STRATEGIC MANAGEMENT
SEMESTER III – COMPULSORY PAPERCRDIT – 3 – 45 HOURS
OBJECTIVE
• This core course deals with the craft of strategy; that is, how to identify and choose a superior competitive position, how to analyse a strategic situation, and finally how to create the organisational context to make the chosen strategy work.
• Introduction to Corporate Strategy• Strategy and the Quest for Competitive Advantage.• Corporate Social Responsibility• Enabling Drivers for Strategies • Strategy and leadership 9. J David Hunger & Thomas L Wheelen, Essentials of Strategic
Management, 3rd ed., Prentice Hall of India, 2002.
11. R Srinivasan, Strategic Management: The Indian Context, 2nd ed., Prentice Hall of India,
A PERSPECTIVE INTO STRATEGY- EXAMPLE
GROWTH OF BANKING SECTOR IN INDIAPRE-NATIONALISATIONNATIONATIONALISATIONPOST NATIONALISATION TILL 1991OPENING UP OF BANKING SECTOR-NEW PRIVATE SECTOR BANKSIMPACT OF LIBERALISATIONGOVT REGULATION –DILUTEDMULTIFOLD EXPANSION IN BANKING SERVICES….NON-FUNDED
FINANCIAL SERVICESCOMPETITION……..CUSTOMER SUPREMENEW PRODUCTS AND NEW SCENARIO
23. Philip Sadler, Strategic Management, 2nd ed., Kogan Page India, 2002.24. Garth Saloner, Andrea Shepard, Joel Podolny, Strategic Management, John Wiley & Sons (Asia), 2001.
26. John A Pearce II, Richard B Robinson, Jr., Strategic Management: StrategyFormulation and Implementation, 5TH ed. AND LATTER EDITIONS, AITBS Publishers & Distributors, 2002. (Irwin publications-usa)
Introduction to Corporate Strategy-Unit 1
• Strategy and Strategic Management• Mission and Vision Statements• Goals & Objectives• Competitive advantage• SWOT Analysis
• STRATEGIC PLANNING – PLANNING WITH AN EXTENDED TIME FRAME COVERING WIDE SPECTRUM OF ACTIVITIES AND CONTINUOUS VIGIL ON CHANGES IN ENVIRONMENT ESPECIALLY EXTERNAL (Alfred Chandler…Strategy and Structure)
• Strategic, Operational and Tactical• Strategic Planning is NOT Forecasting(Drucker)• Levels of Strategic Planning-corporate,
business(SBU),functional-----------with COORDINATION of all the three levels
Elements of strategy• Goals• Scope• Competitive Advantage• Logic
• Strategic Management involves developing a game plan to guide an organisation as it strives to achieves its goals, objectives and aims to keep it in that direction
Competative Advantage indicates to a composition of factors that provides to a company an unique advantage/position in the market---------USP?
Plans to acquire/attain this unique advantage----Strategies – an impressionable image in the minds of customers?
Core Competencies:A Unique set of capabilities in operational
areas that makes the company go beyond its competitors
Key Attributes of Strategic Management: Directs the organization toward overall goals
and objectives. Involves the inclusion of multiple stakeholders
in decision making. Needs to incorporate short-term and long-term
perspectives. Recognizes tradeoffs between efficiency and
effectiveness.
The Strategic Management Process Analyzing
Goals and Objectives
Analyzing the External
Environment
Analyzing the Internal
Environment
Assessing Intellectual
Capital
Formulating Business-Level Strategies
Formulating International
Strategies
Formulating Corporate-Level
Strategies
Formulating Internet Strategies
Implementation:Strategic Controls
Implementation: Organization
Design
Strategic Leadership:
Excellence, Ethics, and Change
Strategic Leadership: Fostering
Entrepreneurship
Strategy Analysis
Strategy Formulation Strategy Implementation
WELPOINT-HEALTH’S NETWORK
• Vision• WELLPOINT will redefine our industry:
• Through a new generation of consumer-friendly products that put individuals back in control of their future.
• Mission• The WELLPOINT companies provide health security by
offering a choice of quality branded health and related financial services designed to meet the changing expectations of individuals, families and their sponsors throughout a lifelong relationship.
THREE LEVELS OF STRATEGY-TOP LEVEL/CORPORATE LEVEL-BUSINESS LEVEL-OPERATION LEVEL
STRATEGY MAKERSBENEFITS OF STRATEGIC MANAGEMENTSTRATEGIC MANAGEMENT AS A PROCESS
COMPANY MISSION
• THE NEED FOR AN EXPLICIT MISSION• FORMULATING MISSION• PREAMBLE>BASIC PURPOSE>WHAT WE
DO>WHERE WE DO IT>• MISSION STATEMENT COMPONENTS• COMPANY GOALS: SURVIVAL ,GROWTH,
PROFITABILITY, PHILOSOPHY, PUBLIC IMAGE, CUSTOMERS, QUALITY
• Igor Ansoff (1965) :The common thread among the organisations, activities, and product markets, that defines the essential nature of business the the organisation was or planned to be in future.
• Henry Mintzerg (1987) “ Strategies are not always the outcome of rational planning…..a pattern in a stream of decisions and actions”
• Ansoff (1984) “Basically strategy is a set of decision making rules for the guidance of organisational behaviour”
• William Glueck: “Strategy is unified, comprehensive and integrated plan that relates the strategic advantage of the firm to the challenges of the environment and is designed to ensure that the basic objectives of the enterprise are achieved through implementation process.
w.Glueck “Business Policy and Strategic Management” McGraw Hill
• Corporate strategy is gaining importance with globalisation and privatisation
• It deals mostly with external environment• It is being formulated at the higher levels of
management• It integrates-planning, implementation, evaluation&
control.• It is related to long-term• It provides an overall direction for guiding the
organisation
Components of Corporate strategy
• Objectives – timeframe, attainable, challenging, measurable and controllable
• Vector• Competitive Advantage• Synergy – effective means to accomplish
objectives.Functions of Corporate Strategy:• Assists in deployment of scarce resources
• Focuses on the appropriate organisational set up, administration of organisational processes.
• It offers techniques to manage changes• It furnishes the management with a
perspective….and gives equal weight to present and future opportunities
• Provides management an important tool to tackle highly complex environment especially external one
Kinds of corporate strage
• Stability Strategy• Expansion Strategy• Retrenchment• Combination Strategy
Business Strategy of Porter:Cost Leadership; differentiation; focus( lower
cost or differentiation/narrow target)
Case of two-wheeler industry in india
• World scenario - $25 billion worth market• 60% market in India and China• Honda-Yamaha-Suzuki-Kawaski• Japan Strategy of setting shops in low cost
countries
Indian Scenario: Scooter a Fading concept – we to me among customers!!; also fuel efficiency engines
The Strategic Management Process Analyzing
Goals and Objectives
Analyzing the External
Environment
Analyzing the Internal
Environment
Assessing Intellectual
Capital
Formulating Business-Level Strategies
Formulating International
Strategies
Formulating Corporate-Level
Strategies
Formulating Internet Strategies
Implementation:Strategic Controls
Implementation: Organization
Design
Strategic Leadership:
Excellence, Ethics, and Change
Strategic Leadership: Fostering
Entrepreneurship
Strategy Analysis
Strategy Formulation Strategy Implementation
• Strategic management process – in two parts- information process part and decision making part
• Information process-external and internal• Decision making process-development of
alternatives, choice, implementation and control
Steps in Strategic management
• Set out the vision, Mission • External Analysis• Internal analysis• Strategies Formulation• Business Strategy formulation• Assessment and Control
SWOT ANALYSIS
• STRENGTH
• WEAKNESSES
• OPPORTUNITIES
• THREATS
• DYNAMIC AND STABLE ENVIRONMENT• CONCEPT OF LIFE CYCLE OF PRODUCTS AND
DYNAMICS IN THE ENVIRONMENT• CHARECTERISTICS OF DYNAMIC
ENVIRONMENT• STRATEGIES IN STABLE ENVIRONMENT
• PRODUCT LIFE CYCLE CONCEPT• INDUSTRY PASSES THROUCH DIFFERENT PHASES
INTRODUCTION
GROWTH MATURITY DECLINE
PRODUCT POOR QLTY.
GOOD SUPERIOR LITTLE DIFF.
BUYER BEHAVIOR
PERSUASION
WIDENING MASS MARKET
SOPHIS.BUYERS
MARKETING
>ADV. REDUCED SERVICEREQD.
<ADV.
STRAT. MARK.SHARE, r&d
MARK. KEY COMP.COST
COST CONTROL
COMP. FEW MANY PRICE COMP.
EXIT/FEWER
RISK HIGH GROWTH=RISK
CYCLE
MARGIN/PROFITS
HIGH/LOW HIGHEST LOW LOW
• STABLE AND DYNAMIC ENVIRONMENT DIFFER DUE TO:
• Long-term changes in growth• Changes in buyers’ segments• Diffusion in proprietary knowledge• Product innovation• Process innovation• Govt. policy changes• Entry & exit of competitors
Industry environment is impacted by dimensions like:
Industry concentrationState of Industry MaturityExposure to international competition
Characteristics of dynamic environment
• Embryonic and spin-off firms• Technological and Strategic uncertainty• High initial costs coupled with speedy cost
reduction• First-time buyers• Short-time horizons
Strategic choices in dynamic environment
• Strategy to influence industry structure• Impacting supplier’s orientation• Strategy of competitive advantage through
low cost or product differentiation or strategic alliances
• Strategy of appropriate timing of entry into industry
Stable environment
• Outbreaks of price, service, promotional warfare
• Competition becomes costly and service oriented, since buyers become knowledgeable
• Capacity addition difficult and hence strategy for capacity addition is the key
• Emergence of international competition• Falling profits and reduced cash flow
Strategies in Stable environment
• Product proliferation• Rationalising the product mix• Price cutting• Excess capacity• Competing internationally• Market penetration• Product developmentMichael A. Hitt, Duane Ireland, Rober E.H- Strategic
Management: Competitiveness & Globalisation…………………..6th edition by South-Western College Pub.
MISSION & VISION ANALYSIS
• THE FUNDAMENTAL PURPOSE THAT SETS A FIRM APART FROM OTHER FIRMS OF ITS TYPE AND IDENTIFY THE SCOPE OF ITS OPERATION IN PRODUCTS/SERVICES AND MARKET TERMS IS DEFINED AS COMPANY MISSION
• MISSION IS THE ENDURING STATEMENT OF FIRM’S INTENT
• Remember, the power of a Vision is not in the wording itself, but in how much your Vision truly reflects the aspirations of your organization’s stakeholders (employees, clients, stockholders, etc.), and in how much it is embodied in your entire workforce everyday behaviors
“At Alcoa, our vision is to be the best company in the world--in the eyes of our customers, shareholders, communities and people. We expect and demand the best we have to offer by always keeping Alcoa's values top of mind.”
Boeing sample vision statements• 1950: Become the dominant player in commercial aircraft and bring the
world into the jet age.• Current: People working together as one global enterprise for aerospace
leadership
Nike sample vision statements• 1960s: Crush Adidas• Current: To be the number one athletic company in the world• Note: Browsing through the web I have found that many people confuse
Mission statements with Vision statements – for instance, I have found several websites claiming that Nike’s Vision statement is: “To bring inspiration and innovation to every athlete in the World” – but this is Nike’s Mission statement. A Vision statement by definition is something you want to become, to achieve, it is a seductive image of an ideal future – whereas a Mission statement explains the purpose of the organization – why it exists – it captures the organization’s soul.
American Standard Company
• Slogan / MottoRaising the Standard
• DescriptionThe American Standard Company is into supplying air-conditioning systems, plumbing products, and automotive braking systems. Their products are well-known under the brands Trane(r) and American Standard(r) for their air conditioning systems, American Standard(r) and Ideal Standard(r) for their plumbing fixtures, and WABCO(r) for their electronic braking, stability, suspension and transmission control systems.
• Mission StatementAmerican Standard's mission is to "Be the best in the eyes of our customers, employees and shareholders."
Citigroup
• Slogan / MottoKnowledge is your greatest asset
• DescriptionCitigroup is a financial institution divided into these major segments: Global Consumer, Corporate and Investment Banking, and Global Wealth Management. Citigroup Global Consumer business offers banking services such as bank accounts, deposits, loans, portfolio and investment management, insurance, etc. The Corporate and Investment Banking business involves banking transactions on an international level. Global Wealth Management involves having portfolio management and investment advisory services.
• Mission StatementOur goal for Citigroup is to be the most respected global financial services company. Like any other public company, we're obligated to deliver profits and growth to our shareholders. Of equal importance is to deliver those profits and generate growth responsibly.
• IT EMBODIES THE BUSINESS PHILOSOPHY OF STRATEGY MAKERS
• IMPLIES THE IMAGE THE FIRM SEEKS TO PROJECT
• REFLECTS THE FIRM’S SELF-CONCEPT• INDICATES FIRM’S PRINCIPAL
PRODUCT/SERVICE AREAS• PRIMARY CUSTOMER NEEDS THE FIRM SEEKS
TO SATISFY
• NEED FOR MISSION1. ENSURE UNIFORMITY WITHIN FIRM2. BASIS FOR MOTIVATING THE USE OF FIRM’S
RESOURCES3. ESTABLISH THE GENERAL TONE OF THE FIRM4. TO SERVE AS A FOCAL POINT FOR THOSE WHO WISH
TO MOVE FURTHER AND DETER OTHERS5. FACILITATE FRAMING OF WORK STRUCTURE6. TRANSLATE THE PURPOSE INTO TRANSACTION GOALS
LIKE COST, TIME, PERFORMANCE PARAMETERS
• FORMULATING MISSIONBUSINESS AT ITS INCEPTIONBASIC PRODUCT/SERVICE/PRIMARY
MARKET/PRINCIPAL TECHNOLOGYITT BARTON(Now barton Instruments) “ THE UNIT’S
MISSION IS TO SERVICE INDUSTRY AND GOVERNMENT WITH QUALITY INSTRUMENTS USED FOR THE PRIMARY MEASUREMENT, ANALYSIS, AND LOCAL CONTROL OF FLUID FLOW, LEVEL, PRESSURE, TEMPERATURE AND FLUID PROPERTIES…………………”
Company goals: Survival, Growth,& ProfitabilityHP :”To achieve sufficient profit to finance our
company growth and to provide the resources we need to achieve our other corporate objectives………….”
Growth> HP :”To let our growth be limited only by our profits and our ability to develop and produce technical products that satisfy real customer needs……….”
The Mission statement to state the scope for diversion in growth strategies
COMPONENETS OF EXTERNAL ENVIRONMENT
• ECONOMIC ENVIRONMENT• SOCIAL AND CULTURAL ENVIRONMENT• POLITICAL ENVIRONMENT• LEGAL ENVIRONMENT• TECHNOLOGICAL ENVIRONMENT• NATURAL ENVIRONMENT• INTERNATIONAL ENVIRONMENT• COMPETITIVE ENVIRONMENT
Internal Analysis
Introduction
Strategic analysis of any Business enterprise involves two stages: Internal and External analysis.
Internal analysis is the systematic evaluation of the key internal features of an organization.
External analysis will be discussed later.
Four broad areas need to be considered for internal analysis
The organization’s resources, capabilitiesThe way in which the organization
configures and co-ordinates its key value-adding activities
The structure of the organization and the characteristics of its culture
The performance of the organization as measured by the strength of its products.
Analysis of the global business
Resources, capabilities and
core competences
Cultural and structural analysis
Global value chain analysis: configuration
and co-ordination
Global products and performance
Internal analysis
ResourcesResources are assets employed in the activities and
processes of the organization.
They can be tangible or intangible.They can be obtained externally (organization-
addressable) or internally generated (organization-specific).
They can be specific and non-specific:Specific resources can only be used for highly
specialized purposes and are very important to the organization in adding value to goods and services.
Assets that are less specific are less important in adding value, but are more flexible.
Resources fall within several categories:HumanFinancialPhysicalTechnologicalInformational
An audit of resources would be likely to include an evaluation of resources in terms of availability, quantity and quality, extent of employment, sources, control systems and performance.
General Competences/capabilitiesThey are assets like industry-specific skills,
relationships and organizational knowledge which are largely intangible and invisible assets.
Competences and capabilities will often be internally generated, but may be obtained by collaboration with other organizations.
Certain competences are likely common to competing businesses within a global industry or strategic group.
Core Competences/Distinctive CapabilitiesCore competences or distinctive capabilities
are combinations of resources and capabilities which are unique to a specific organization and which are responsible for generating its competitive advantage.
Kay (1993) identified four potential sources of Core competences:ReputationArchitecture (i.e., internal and external relationship)InnovationStrategic assets
Criteria to evaluate Core CompetencesComplexity: How elaborate is the bundle of resources
and capabilities which comprise the core competence?Identifiability: How difficult is it to identify?Imitability: How difficult is it to imitate?Durability: How long does it be replaced by an
alternative competences?Superiority: Is it clearly superior to the competences of
other organizations?Adaptability: How easily can the competence be
leveraged or adapted? Customer orientation: How is the competence perceived
by customers and how far is it linked to their needs?
Core competenceDistinctive and superior
skills, technology relationships,
knowledge and reputation of the firm
Unique, and difficult to copy
Resources:human, financial,
physical, technological,
legal, informational
Tangible andvisible assets
Capabilities:Industry-specific
skills, relationships,organizational
knowledgeIntangible
and invisibleassets
Perceivedcustomer
benefits/value added
+ =
Inputs to the firm’sprocesses
Integration ofresources intovalue-addingactivities
Not all capabilities are corecompetences – only thosethat add greater value thanthose of competitors
Denotes feedback loop denotes core competence development
The relationships between resources, capabilities and core competence
Global Value Chain Analysis
Competitive advantage depends on the ability of the organization to organize its resources and value-adding activities in a way that is superior to its competitors.
Value chain analysis is a technique developed by Porter (1985) for understanding an organization’s value-adding activities and relationship between them.
Value can be added in two ways:By producing products at a lower cost than
competitorsBy producing products of greater
perceived value than those of competitors.
Porter extended value chain analysis to the
value system, analysis of the relationship
between the organization, its suppliers,
distribution channels and customers.
The Value Chain
The value chain is the chain of activities which results in the final value of a business’s products.
Value added, or margin is indicated by sales revenue minus costs.
Porter divided internal parts of organization into primary and support activities
Primary activities are those that directly contribute to production of good or services and organization’s provision to customer
Support activities are those that aid primary activities, but do not themselves add value
Company Infrastructure
Information Systems
Human Resources
Materials Management
Primary Activities
Support Activities
The Firm as a Value Chain
R & D Production Marketing & Sales Service
Certain activities or combinations of activities are
likely to relate closely to the organization’s core
competences, termed core activities. They are:
Add the greatest value
Add more value than the same activities in
competitors’ value chains
Relate to and reinforce core competences
Other value chain activities relate to capabilities,
but do not add greater value than competitors
and therefore do not relate to core competence.
The Value SystemThe value chain of an individual organization
provide an incomplete picture of its ability to add value.
Many value-adding activities are shared between organizations often in the form of a collaborative network.
As organizations identify and concentrate on their core competences and core activities, they increasingly outsource activities to other business for whom such activities are core.
The value system is the chain of activities from supply of resources through to final consumption of a product.
The total value system, in addition to the organization’s own value chain, can consists of upstream linkages with suppliers and downstream linkages with distributions and customers.
The value system is a similar concept to that of the supply chain and illustrates the interactions between an organization, its suppliers, distribution channels and customers.
Supplier Competitor Distributionchannel Customers
Supplier Organization Distributionchannel Customers
Supplier Competitor Distributionchannel Customers
The Value System
The “Global” Value Chain
The configuration of an organization’s activities relates to where and in how many nations each activities in the value chain is performed.
Co-ordination is concerned with the management of dispersed international activities and the linkages between them.
Managers must examine the current configuration of value-adding activities and the extent and methods of co-ordination as part of their strategic analysis, which may determine possibilities for reconfiguration or improving co-ordination
A global business has two broad choices of configuration:Concentration of the activity in a limited
number of locations to take advantage of benefits offered by those locations.
Dispersion of the activity to a large number of locations.
Change in the business environment (e.g., technological change) may well lead to changes over time in the configuration that gives greatest competitive advantage.
Co-ordination is essentially about overseeing the complexity of the organization’s configuration such that all value-adding parts of the business act in concert with each other to facilitate an effective overall synergy.
Those business that overcome the potential difficulties of co-ordination are those that sustain the greatest competitive advantage.
Analysis of configuration and methods of co-ordination assists in the process of understanding current competences and identifying the potential for strengthening and adding to them.
Corecompetences
Coreactivities
Valuechain
Configuration
Concentration Dispersion
Internalactivities
Externalactivities
Co-ordination
Internalco-ordination
InternallinkagesValue-adding
activities
Externalco-ordination
ExternallinkagesSuppliers Channels
Customers
Value system
Managing the value system
Global Organizational Culture and Structure
A global business must have a culture and structure which allow it to carry out its global activities.
The structure of the business must allow it to accomplish its objectives as effectively and as efficiently as possible.
Culture is an important determinant of how effectively the organization operates and has important implications for employee motivation.
Portfolio Analysis
A key concept with regard to successful product or subsidiary strategy is that of portfolio.
Portfolio analysis is used in evaluating the balance of an organization’s range of products.
A broad portfolio can spread risk across more than one market.
A narrow portfolio mean that the organalization become more specialized in its knowledge of fewer products and markets
The BCG MatrixThe Boston Consulting Group (BCG) growth-share
matrix is most often used by organizations in multiproduct and multimarket situations.
BCG matrix offers a way of examining and making sense of a company’s portfolio of product and market interests.
It based on the idea that market share in mature markets is highly correlated with profitability and that is relatively less expensive and less risky to attempt to win share in the growth stage of the market.
Stars Question marks
Cash cows Dogs
Relative market shareHigh Low
1X10X
Rate
of m
arke
t gro
wth
Hig
hLo
w
The Boston Consulting Group matrix
BCG Matrix: Cash cows
Cash cows: A product with a high market share in a low-growth market is normally both profitable and a generator of cash.
Profits from this product can be used to support other products that are in their development phase, ‘milked’ on an on going basis.
Standard strategy would be to manage conservatively, but to defend strongly against competitors.
BCG Matrix: Dogs
Dogs: A product that has a low market share in a low-growth market is termed a dog in that it is typically not very profitable.
Once a dog has been identified as part of a portfolio, it is often discontinued or disposed of.
More creatively, a small share product can be used to price aggressively against a very large competitor as it is expensive for the large competitor to follow suit.
BCG Matrix: Stars
Stars have a high share of a rapidly growing market and therefore rapidly growing sales.
It is the sales manager’s dream, but the account’s nightmare.
It is often necessary to spend heavily on advertising and product improvement so that when the market slows these products become ‘cash flow.’
If market share is lost, the product will eventually become a ‘dog’ when the market stops growing.
BCG Matrix: Question marks
Question marks are aptly named they create a dilemma.
They already have a foothold in a growing market, but if market share cannot be improved they will become ‘dogs.’
Resources need to be devoted to winning market share.
Limitation of the BCG Matrix
There are many relevant aspects relating to products that are not taken into account.
The imprecise nature of its four categories and the difficulties inherent in predicting future market growth.
Global activity may add extra dimension to the process of portfolio analysis.
Value Creation per Unit
Value Creation and Pricing Options
The Value Chain: Primary and Support Activities
Differentiation and Cost Structure: Roots of Competitive Advantage
Efficiency
• The quantity of inputs it takes to produce a given output. Usually measured as outputs over inputs; examples of latter– No. of employees– Capital investment
• Productivity leads to greater efficiency and lower costs– Employee productivity– Capital productivity
Quality
• Superior quality = customer perception of greater value in a specific product’s attributes– Form, features, performance, durability, reliability,
style, design• Quality products = goods and services that are
reliable and that are differentiated by attributes that customers perceive to have higher value
Quality (cont’d)
• The impact of quality on competitive advantage– High-quality products increase the value of
(differentiate) the products in customers’ eyes– Greater efficiency and lower unit costs are
associated with reliable products
Innovation
• The act of creating new, commercially viable products or processes– Product innovation• Creates products that customers perceive as more
valuable, increasing the company’s pricing options
– Process innovation• Creates value by lowering production costs
• Perhaps the most important building block of competitive advantage
Responsiveness to Customers
• Doing a better job than competitors of identifying and satisfying customers’ needs– Superior quality and innovation are integral to
superior responsiveness to customers– Customizing goods and services to the unique
demands of individual customers or customer groups
Responsiveness to Customers (cont’d)
• Sources of enhanced customer responsiveness– Customer response time, design, service, after-
sales service and support • Differentiates a company’s products; leads to
brand loyalty and premium pricing
Drivers of Profitability (ROIC)
Ways to Increase ROIC
• Increase the company’s return on sales– Reduce cost of goods sold– Reduce spending on sales force, marketing,
general, and administrative expenses– Reduce R&D spending– Increase sales revenue more than costs
• Increase sales revenues from invested capital– Reduce the amount of working capital– Reduce amount of fixed capital
The Durability of Competitive Advantage
• Barriers to Imitation– Imitating Resources– Imitating Capabilities
• Capability of Competitors– Strategic commitment– Absorptive capacity
• Industry Dynamism
Why Companies Fail
• Inertia– Companies find it difficult to change their strategies and
structures
• Prior strategic commitments– Limit a company’s ability to imitate and cause competitive
disadvantage
• The Icarus paradox– A company can become so specialized based on past
success that it loses sight of market realities– Craftsmen, builders, pioneers, salesmen
SWOT Analysis
• Strengths• Weaknesses• Opportunities • Threats
The purpose of SWOT Analysis
• It is an easy-to-use tool for developing an overview of a company’s strategic situation– It forms a basis for matching your company’s
strategy to its situation
SWOT is the starting point
• It provides an overview of the strategic situation.
• It provides the “raw material” to do more extensive internal and external analysis.
Opportunities
• An OPPORTUNITY is a chance for firm growth or progress due to a favorable juncture of circumstances in the business environment.
• Possible Opportunities:– Emerging customer needs– Quality Improvements– Expanding global markets– Vertical Integration
Threats
• A THREAT is a factor in your company’s external environment that poses a danger to its well-being.
• Possible Threats:– New entry by competitors– Changing demographics/shifting demand– Emergence of cheaper technologies– Regulatory requirements
Opportunities and Threats form a basis for EXTERNAL analysis
• By examining opportunities, you can discover untapped markets, and new products or technologies, or identify potential avenues for diversification.
• By examining threats, you can identify unfavorable market shifts or changes in technology, and create a defensive posture aimed at preserving your competitive position.
The purpose of Five-Forces Analysis
• The five forces are environmental forces that impact on a company’s ability to compete in a given market.
• The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.
Threat of New Entrants
Threat of New EntrantsThreat of New
EntrantsThreat of New
Entrants
Porter’s Five Forces Model of CompetitionPorter’s Five Forces
Model of Competition
Threat of New EntrantsThreat of New Entrants
Barriers to Entry
Barriers to Entry
Expected Retaliation
Government Policy
Economies of Scale
Product Differentiation
Capital Requirements
Switching Costs
Access to Distribution Channels
Cost Disadvantages Independent of Scale
Bargaining Power of Suppliers
Bargaining Power of Suppliers
Threat of New EntrantsThreat of New
EntrantsThreat of New
Entrants
Porter’s Five Forces Model of CompetitionPorter’s Five Forces
Model of Competition
Bargaining Power of SuppliersBargaining Power of Suppliers
Suppliers exert power in the industry by:Suppliers exert power in the industry by:
* Threatening to raise* Threatening to raiseprices or to reduce qualityprices or to reduce quality
Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases
Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases
Suppliers are likely to be powerful if:
Supplier industry is dominated by a few firms
Suppliers’ products have few substitutes
Buyer is not an important customer to supplier
Suppliers’ product is an important input to buyers’ product
Suppliers’ products are differentiated
Suppliers’ products have high switching costs
Supplier poses credible threat of forward integration
Bargaining Power of Buyers
Bargaining Power of Buyers
Threat of New EntrantsThreat of New
EntrantsThreat of New
Entrants
Bargaining Power of Suppliers
Bargaining Power of Suppliers
Porter’s Five Forces Model of CompetitionPorter’s Five Forces
Model of Competition
Bargaining Power of BuyersBargaining Power of Buyers
Buyers compete with the supplying industry by:
Buyers compete with the supplying industry by:
* Bargaining down prices* Bargaining down prices
* Forcing higher quality* Forcing higher quality
* Playing firms off of* Playing firms off ofeach
othereach
other
Buyer groups are likely to be powerful if:
Buyers are concentrated or purchases are large relative to seller’s sales
Purchase accounts for a significant fraction of supplier’s sales
Products are undifferentiated
Buyers face few switching costs
Buyers’ industry earns low profits
Buyer presents a credible threat of backward integration
Product unimportant to quality
Buyer has full information
Threat of Substitute Products
Threat of Substitute Products
Threat of New EntrantsThreat of New
EntrantsThreat of New
Entrants
Bargaining Power of Buyers
Bargaining Power of Buyers
Bargaining Power of Suppliers
Bargaining Power of Suppliers
Porter’s Five Forces Model of CompetitionPorter’s Five Forces
Model of Competition
Threat of Substitute ProductsThreat of Substitute Products
Products with similar function limit the prices firms can charge
Products with similar function limit the prices firms can charge
Keys to evaluate substitute products:
Products with improving price/performance tradeoffs relative to present industry products
Example:
Electronic security systems in place of security guards
Fax machines in place of overnight mail delivery
Threat of Substitute Products
Threat of Substitute Products
Threat of New EntrantsThreat of New
EntrantsThreat of New
Entrants
Rivalry Among Competing Firms in Industry
Rivalry Among Competing Firms in Industry
Bargaining Power of Buyers
Bargaining Power of Buyers
Bargaining Power of Suppliers
Bargaining Power of Suppliers
Porter’s Five Forces Model of CompetitionPorter’s Five Forces
Model of Competition
Rivalry Among Existing CompetitorsRivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:Jockeying for strategic position
Using price competition
Staging advertising battles
Making new product introductions
Increasing consumer warranties or service
Occurs when a firm is pressured or sees an opportunityPrice competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but may be costly to smaller competitors
Cutthroat competition is more likely to occur when:
Rivalry Among Existing CompetitorsRivalry Among Existing Competitors
Numerous or equally balanced competitorsSlow growth industryHigh fixed costs
Lack of differentiation or switching costs
High storage costs
Capacity added in large increments
High strategic stakesHigh exit barriers
Diverse competitors
The Five Forces are Unique to Your Industry
• Five-Forces Analysis is a framework for analyzing a particular industry.– Yet, the five forces affect all the other
businesses in that industry.
TYPES OF STRATEGIES
DIRECTIONAL STRATEGIESGrowth
Concentration Vertical Growth Horizontal GrowthDiversification Concentric Conglomerate
Stability
Cautiously proceedMaintain
Profit
Retrenchment
TurnaroundDivest/SaleLiquidation
STRATEGIC ALTERNATIVES
Generic or grand or basic strategies•Stability - better after sales service, modernize plant,
bulk discount, Improve performance to sustain•Expansion - Change in customer group, function,
technology•Retrenchment - Withdrawal - Customer group, function,
technology (unprofitable)•Combination•E.g. Wide variety of services to customers (stability)
- New products in product range (expansion)
STRATEGIC ALTERNATIVES
Michael Porter - Three type of generic strategies
- Overall cost leadership strategy
- Differentiation strategy
- Focus on niche market
DIMENSIONS OF GRAND/GENERIC STRATEGIES
I. Internal/External
- Independent of any other entity
- Association with other entity
II. Related/Unrelated
- To existing customer groups, existing customer function,
technologies
DIMENSIONS OF GRAND/GENERIC STRATEGIES
III. Horizontal/Vertical
- Serving additional customer groups
-consolidating backward/forward
IV. Active/Passive
Active - offensive strategy
Passive - Defensive strategy
4 grand strategies × 4 dimensions × 2 types of each dimensions × 3 dimensions of each business definition = 96 Mixed strategies
MODERNIZATION STRATEGIES
Developing new technology strategy i.e. technological upgradation as a strategy
- Increased production, lower cost, improve efficiency and productivity
- Extensively used by Indian organization - stability - prior to expansion & diversificationIf pace of modernization is low - internal stability strategy, high - internal expansion strategy
Merge with another company - for modern - external expansion strategy
DIVERSIFICATION AND INTEGRATION STRATEGIES
1. Vertical Integration
- make new products to serve its own needs
- backward/forward integration
2. Horizontal Integration
- Same product - more customer group
- merger similar companies
Spartek Ceramics takeover of Neyveli Ceramics
DIVERSIFICATION AND INTEGRATION STRATEGIES
3. Concentric diversification•Marketing & technology related - rain coat manufacturer - rubber based items - gloves, shoes•Technology related- leasing company - hire purchase•Marketing related - Unrelated technology (cosmetic & sewing machines - women)
4. Conglomerate diversification
- Unrelated to customer groups, function, technology
ITC - Cigarette & Hotel
TTK group - Chemicals, hosiery, contraceptives
MERGER, TAKEOVER AND JOINT VENTURE STRATEGIES
Diversification & Integration
Merger ( Amalgamation)
A acquires B - B merged with A
A & B C - Consolidated
Horizontal Concentric
Vertical Conglomerate
JOINT VENTURE
•2 firms in one industry•2 firms across different industries•Indian & foreign firm in India•Indian & foreign firm in foreign country•Indian & foreign firm in third country
Last two types are on increase now
TURNAROUND STRATEGIES
Reversing a negative trend
Retrenchment - internal/external - improve internal efficiency - Divestment/liquidation
Danger signs:•Persistent negative cash flows•Negative profits•Declining market share•Deterioration in physical facilities•High turnover, low morale, Mismanagement•Uncompetitive products, sick company
MANAGING TURNAROUND
•Existing team - support external consultant - credibility - rare•Existing team - withdraws temporarily - turnaround specialist - employed•Replace existing team / C.EApproaches:
- Surgical - Human approach
ACTION PLAN FOR TURNAROUND
• Analysis of product, market, production process, competition, market segment positioning
• Clear thinking - market place &production logic• Implementation of plans - target - setting,
feedback, remedial action
DIVESTMENT
Divestment
- (divestiture or cutback) - sale of or liquidation of a portion of business
- SBU or profit center
1. Spinning it off - financially and managerially independent company with stake
2. Sell a unit outright
Kelvinator India - spin-off - Avanti scooters - high production cost
LIQUIDATION•Rarely - large companies liquidate•Buyers rare for purchase of assets•Court, voluntary, subject to supervision of court
Combination strategies - popular
Criteria for strategic choice
• Does strategy exploit the opportunities present in the environment?
• Is it consistent with the resources of the firm, its competitive advantage & core competence?
• Is the chosen level of risk feasible?• Is it appropriate to the values & aspirations of
the firm?
• Gap Analysis
• Consider the Selection factor. -- Criteria for evaluation alternatives.• Evaluate strategic alternatives.• Make choice
t1 t2
P re sen t
D es ired
P e rf. g a p
Factors affecting strategic choice
• Nature of environment – stable?• Firm’s internal realities• Ambition of CEO / owners• Company culture• Firm’s capacity to execute the st.• Resource allocation
Strategy Implementation• Evolve a systematic procedure to implement the
strategy chosen– Procedural implementation plan– Proper resource allocation plan– Structural implementation plan– Functional implementation plan– Behavioural implementation plan
• Evaluate and control through strategic and operational control measures
• Success of a strategy is very much dependent on how the strategy is executed