Strategic Management

STRATEGIC MANAGEMENT
Module 1
INTRODUCTION TO STRATEGIC MANAGEMENT (1 of 2)
M1 - Introduction to strategic management

1.1 Strategic management basics 1.2 Need for Strategic Planning 1.3 Strategic Management Model 1.4 Strategy formulation 1.5 Business ethics and Strategic management 1.6 Vision and Mission 1.7 Setting Objectives 1.8 Strategic Intent
1.1 Strategic management basics
Basic general work flow diagram
Plan (why ? What ? when ?)
Implement (To achieve )
Review
(w.r.t ?)
Modifications / Continue
CLASS DISCUSSION ON EXAMPLES of this model

4
1.1 Strategic management basics (Contd)
Strategy : Potential actions that require top management decisions and large amounts of firms resources. A plan to win.
Strategic Management is the set of decisions and actions used to formulate and implement specific strategies that will achieve a competitively superior fit between the organization and its environment. Alternate definition The Art and Science of Formulating, Implementing, and Evaluating Cross-Functional Decisions That Enable an Organization to Achieve Its Objectives
Strategic management is a 3 step process 1. Strategy formulation or Strategic Planning specifies the strategies for achieving an organizations objectives 2. Strategy implementation putting the strategic plan into action takes place through the basic organizational architecture 3. Strategic evaluation : comparing actual results with expected outcomes 5 after the implementation of the strategy.
M 1.3 Strategic Management Model (Contd)
Strategic management framework model
Analyze Internal Environment
Analyze External Environment
Vision / Mission Strategic Goals Formulate Strategy Implement Strategy Evaluate strategy Strategic Competitiveness and above average returns
6
1.2 Need for Strategic Planning
Strategy formulation or Strategic Planning Need : specifies the strategies for achieving an organizations objectives : If we fail to plan we plan to fail. A Strategic plan provides the following :1. A blue print / road map 2. Role & responsibility clarity 3. Helps an organization to take decisions on long range forecasts. 4. Allows the firm to deal with a new trend and meet competition in an effective manner. 5. Helps the management becomes flexible to meet unanticipated changes. 6. Efficient strategy formation and implementation result into financial benefits to the organization in the form of increased profits. 7. Focus in terms of organizational objectives and thus provide clarity of direction for achieving the objectives. 8. Organizational effectiveness can be measured against planned strategy 9. It gets managers into the habit of thinking and thus makes them, proactive and more conscious of their environment. 10. Strategy formulation gives an opportunity to the management to involve different levels of management in the process. 11. Improved corporate communication, coordination and allocation of resources.
7
M 1.3 Strategic Management Model
A Comprehensive Strategic Management Model

Feedback
Perform External Audit
Develop Mission Statement
Establish Longterm Objectives
Generate, Evaluate, and Select Strategies
Establish Policies and Annual Objectives
Allocate Resources
Measure and Evaluate Performance
Perform Internal Audit
Strategy Formulation
Strategy Implementation
Strategy Evaluation
The Stages and Activities in the Strategic Management Process
Stages
Strategy formulation Conduct research
Activities
Integrate intuition with analysis Make decisions
Strategy implementation
Establish annual objectives Review internal and external factors
Devise policies
Allocate resource s Take corrective action
Strategy evaluation
Measure performance
Strategic management is a 3 step process 1. 2. Strategy formulation or Strategic Planning : specifies the strategies for achieving an organizations objectives Strategy implementation takes place through the basic organizational architecture (people, structure, policies, procedures, systems, incentives and governance) that makes things happen. Successful implementation rests on the shoulders of the managers who should be able to motivate the employees to perform at high levels. Time is of essence in strategy implementation. Strategic evaluation : comparing expected outcomes with actual results after the implementation phase. It is a tool that leaders use to assess the effectiveness of an organizations strategy towards accomplishment of its goals. i. Review internal and external factors that are bases for the current strategies that are bases for the current strategies ii. Measuring performance against stated objectives iii. Taking corrective action
3.
Dynamic nature of external environment demands periodic reexamination of all the elements.
10
Ten Key External Forces
Competitive Economic Technological
Social Cultural
Demographic
Governmental Political
Environmental
Legal
Fourteen Key Internal Forces
Management Marketing Manufacturing Production/ Operations
Research & Development
Purchasing
Distribution
Key Internal Forces (cont.)
Finance/Accounting Packaging Human Resource Management Vendor Relations Promotion
Employee/ Manager Relations

Computer Information Systems
1.4 Strategy formulation Relationship between companys Strategy and its business model
Business Mission
External Opportunities and Threats
Internal Strengths and Weaknesses
1.4 Strategy formulation (Contd)
Relationship between companys Strategy and its business model (Contd)

Prerequisite elements for strategy formulation : Vision - where organization wants to be Mission - the purpose of the orgzn Long term goals / objectives - specific outcomes Results of environmental (external & internal ) audit - SWOT analysis Good strategy will specify the following : Arena (focus area) Vehicles (how to get there) Differentiators Staging (speed and sequence of moves) Economic logic (returns) The Basis for Good Strategic Decisions : Intuition + Analysis Key decisions should not be rushed and too much emphasis should not be placed on gut feel / intuition. Strategic decision making needs a balance between rationality and intuition
15
16
17
18
Pitfalls to Avoid in Strategic Management Using to gain control over decisions & resources Doing only to satisfy regulatory requirements Moving hastily from mission to strategy formulation Failing to communicate to employees Intuitive decisions that conflict with formal plan Top management not supportive of process Failing to use as standard for performance measurement Delegating to a planner vs.. involvement of managers Failing to involve key personnel Failing to create collaborative environment Formality that stifles creativity and flexibility
1.4 Strategy formulation (Contd) Benefits of Strategic Management
1. 2.
- Improved Communication - Increased Understanding
3.
4. 5.
Enhanced Commitment
Greater Productivity More Effective Strategies
6.
7.
Higher Productivity
Allow Firm to Influence, Initiate, and Anticipate
8.
Be Proactive Rather Than Reactive
Module 1
INTRODUCTION TO STRATEGIC MANAGEMENT (2 of 2)
21
M 1.5 Business ethics and Strategic management
Ethics : Doing things which are considered right as per the society Business Ethics : Principles of conduct within organizations that guide decision making and behaviour. Implementing Code of business ethics : Provides basis on which policies can be devised to guide daily behavior and decisions in the workplace Good business ethics is a prerequisite for good strategic management Good ethics is just good business Strategists responsible for high ethical principles All strategic processes have ethical ramifications Formal codes of ethics are in place for many businesses Internet privacy emerging as ethical issue of immense proportions
M 1.5 Business ethics and Strategic management (Contd)
Few unethical Business actions : Misleading advertising Misleading labeling Environmental harm Poor product or service safety Padding expense accounts Insider trading Dumping flawed products in the markets
M 1.5 Business ethics and Strategic management (Contd)
How to Create an Ethical Culture

Develop a Code of Business Ethics Ask All Managers and Employers to Sign the Code Offer Business Ethics Workshops Include Ethics Factors in Performance Appraisal Instruments Link Compensation to Ethical Behavior Encourage Whistle Blowing Encourage Good Business Ethics Behavior Publicize Good Business Ethics Behavior Reward Good Business Ethics Behavior Set a Good Example
M 1.6 Vision and Mission
Mission statement answers the question: What is our business? Vision statement answers the question: What do we want to become? Many companies develop both Shared vision can motivate employees Develops a commonality of interests Helps focus on opportunity & challenge
Developing Vision & Mission Clear mission is needed before alternative strategies can be formulated and implemented Important to have as broad range of participation as possible among managers in developing the mission
M 1.6 Vision and Mission (Contd)
Mission should do seven things 1. Define what the organization is 2. Define what the organization aspires to be 3. Limited to exclude some ventures 4. Broad enough to allow for creative growth 5. Distinguish the firm from all others 6. Serve as framework to evaluate current activities 7. Stated clearly so that it is understood by all Customer Orientation 1. A good mission statement reflects the anticipations of customers. 2. Identify customer needs 3. Provide product/service to satisfy needs 4. AT&Ts mission focuses on communications, not telephones 5. Exxons mission focuses on energy, not on oil and gas
Vision Statement The Bellevue Hospital is the LEADER in providing resources necessary to realize the communitys highest level of HEALTH throughout life. The Vision of USGS is to be a world leader in the natural sciences through our scientific excellence and responsiveness to societys needs. It is the vision of the California Energy Commission for Californians to have energy choices that are affordable, reliable, diverse, safe, and environmentally acceptable.
Mission Statement 1. The Bellevue Hospital, with respect, compassion, integrity, courage, honors the individuality and confidentiality of our patients, employees, and community, and is progressive in anticipating and providing future health care services. 2. The Mission of USGS is to serve the Nation by providing reliable scientific information to
Describe and understand the Earth Minimize loss of life and property from natural disaster Manage water, biological, energy, and mineral resources; and enhance and protect our quality of life.
Effective mission statements Broad in scope Generate range of feasible strategic alternatives Not excessively specific Reconcile interests among diverse stakeholders Finely balanced between specificity & generality Arouse positive feelings and emotions Motivate readers to action Generate the impression that firm is successful, has direction, and is worthy of time, support, and investment Reflect judgments re: future growth Provide criteria for selecting strategies Basis for generating & screening strategic options Are dynamic in orientation
Components of mission Mission statements vary in Length Content Format Specificity Mission must include the 9 elements, as the mission statement is the most public and visible part of the strategic-management process and must answer the corresponding questions 1. Customers : Who are the firms customers? 2. Products or services : What are the firm's major products or services? 3. Markets : Geographically, where does the firm compete? 4. Technology : Is the firm technologically current? 5. Survival, growth, and profitability : Is the firm committed to growth and financial soundness? 6. Philosophy : What are the basic beliefs, values, aspirations, and ethical priorities of the firm?
9 elements (Contd)
7. Self-concept : What is the firms distinctive competence or major competitive advantage? 8. Concern for public image : Is the firm responsive to social, community, and environmental concerns? 9. Concern for employees : Are employees a valuable asset of the firm? Mission vs. Purpose The term purpose was used by some strategists. At some places, it was used as synonymous to mission. A few major points of distinction are as follows: i) Mission is the societal reasoning while the purpose is the overall reason. ii) Mission is external reasoning and relates to external environment. Purpose is internal reasoning and relates to internal environment. iii) Mission is for outsiders while purpose is for its own employees.
Importance of Vision & Mission Although research results are mixed, firms with formal mission statements 2X average return on shareholders equity Positive relationship to organizational performance 30% higher return on certain financial measures
VISION definition lays stress on the following: Broad and all inclusive intentions Vision is forward thinking process. A few important aspects regarding vision are as follows: It is more of a dream than articulated idea. It is an aspiration of organization. Organization has to strive and exert to achieve it. It is powerful motivator to action. Vision articulates the position of an organization which it may attain in distant future.
Envisioning Strategic Framework This is the process of creating vision. It is a difficult and complex task. A well conceived vision must have: Core Ideology Envisioned Future
Core Ideology will remain unchanged. It has the enduring character. It consists of core values and core purpose. Core values are essential tenets of an organization. Core purpose is related to the reasoning of the existence of an organization. Envisioned Future will basically deal with following: The long term objectives of the organization. Clear description of articulated future.
Advantages of having a Vision 1. A few benefits accruing to an organization having a vision are as follows: 2. They foster experimentation. 3. Vision promotes long term thinking. 4. Visions foster risk taking. 5. They can be used for the benefit of people. 6. They make organizations competitive, original and unique. 7. Good vision represent integrity. 8. They are inspiring and motivating to people working in an organization.
M 1.7 Setting Objectives
OBJECTIVES AND GOALS Objectives refer to the ultimate end results which are to be accomplished by the overall plan over a specified period of time. The vision, mission and business definition determine the business philosophy to be adopted in the long run. The goals and objectives are set to achieve them. Meaning Objectives are open ended attributes denoting a future state or out come and are stated in general terms. When the objectives are stated in specific terms, they become goals to be attained. In strategic management, sometimes, a different viewpoint is taken. Goals denote a broad category of financial and non-financial issues that a firm sets for itself. Objectives are the ends that state specifically how the goals shall be achieved. Objectives are the manifestation of goals whether specifically stated or not. Difference between objectives and goals 1. The goals are broad while objectives are specific. 2. The goals are set for a relatively longer period of time. 3. Goals are more influenced by external environment. 4. Goals are not quantified while objectives are quantified.
Need for Establishing Objectives 1. Objectives provide yardstick to measure performance of a department or SBU or organization. 2. Objectives serve as a motivating force. All people work to achieve the objectives. 3. Objectives help the organization to pursue its vision and mission. Long term perspective is translated in short-term goals. 4. Objectives define the relationship of organization with internal and external environment. 5. Objectives provide a basis for decision-making. All decisions taken at all levels of management are oriented towards accomplishment of objectives.
What Objectives should be set? According to Peter Druker, objectives should be set in the area of market standing, innovation productivity, physical and financial resources, profitability, manager performance and development, worker performance and attitude and public responsibility.
Profit Objective: It is the most important objective for any business enterprise. In order to earn a profit, an enterprise has to set multiple objectives in key result areas such as market share, new product development, quality of service etc. Ackoff calls them performance objectives. Marketing Objective may be expressed as: to increase market share to 20 percent within five years or to increase total sales by 10 percent annually. They are related to a functional area. Productivity Objective may be expressed in terms of ratio of input to output. This objective may also be stated in terms of cost per unit of production. Product Objective may be expressed in terms of product development, product diversification, branding etc. Social Objective may be described in terms of social orientation. It may be tree plantation or provision of drinking water or development of parks or setting up of community centers. Financial Objective relates to cash flow, debt equity ratio, working capital, new issues, stock exchange operations, collection periods, debt instruments etc. For example a company may state to decrease the collection period to 30 days by the end of this year. Human resource Objective may be described in terms of absenteeism, turnover, Strategic Framework number of grievances, strikes and lockouts etc. An example may be to reduce absenteeism to less then 10 percent by the end of six months.
Characteristics of Objectives i) They form a hierarchy. It begins with broad statement of vision and mission and ends with key specific goals. These objectives are made achievable at the lower level. ii) It is impossible to identify even one major objective that could cover all possible relationships and needs. Organizational problems and relationship cover a multiplicity of variables and cannot be integrated into one objectives. They may be economic objectives, social objectives, political objectives etc. Hence, multiplicity of objectives forces the strategists to balance those diverse interests. iii) A specific time horizon must be laid for effective objectives. This timeframe helps the strategists to fix targets. iv) Objectives must be within reach and is also challenging for the employees. If objectives set are beyond the reach of managers, they will adopt a defeatist attitude. Attainable objectives act as a motivator in the organization. v) Objectives should be understandable. Clarity and simple language should be the hallmarks. Vague and ambiguous objectives may lead to wrong course of action. vi) Objectives must be concrete. For that they need to be quantified. Measurable objectives help the strategists to monitor the performance in a better way. vii) There are many constraints internal as well as external which have to be considered in objective setting. As different objectives compete for scarce resources, objectives should be set within constraints.
Process of Setting Objectives Glueck identifies four factors that should be considered for objective setting. These factors are: the forces in the environment, realities of an enterprises resources and internal power relations, the value system of top executives and awareness by the management of the past objectives. They are briefly narrated below: i) Environmental forces, both internal and external, may influence the interests of various stake holders. Further, these forces are dynamic by nature. Hence objective setting must consider their influence on its process. ii) As objectives should be realistic, the efforts be made to set the objectives in such a way so that objectives may become attainable. For that, existing resources of enterprise and internal power structure be examined carefully. iii) The values of the top management influence the choice of objectives. A philanthropic attitude may lead to setting of socially oriented objectives while economic orientation of top management may force them to go for profitability objective. iv) Past is important for strategic reasons. Organizations cannot deviate much from the past. Unnecessary deviations will bring problems relating to resistance to change. Management must understand the past so that it may integrate its objectives in an effective way.
M 1.8 Strategic Intent
STRATEGIC INTENT The foundation for the strategic management is laid by the hierarchy of strategic intent. The concept of strategic intent makes clear WHAT AN ORGANISATION STANDS FOR, Harvard Business Review, 1989 described the concept in its infancy. Hamed and Prahlad coined the term strategic intent. A few aspects about strategic intent are as follows: It is an obsession with an organization. This obsession may even be out of proportion to their resources and capabilities. It envisions a derived leadership position and establishes the criterion, the organization will use to chart its progress. It involves the following: Creating and Communicating a vision Designing a mission statement Defining the business Setting objectives
M 1.8 Strategic Intent
STRATEGIC INTENT (Contd) Vision serves the purpose of stating what an organization wishes to achieve in the long run. Mission relates an organization to society. Business explains the business of an organization in terms of customer needs, customer groups and alternative technologies. Objectives state what is to be achieved in a given time period. The strategic intent concept also encompasses an active management process that includes focusing the organizations attention on the essence of winning. The concept of stretch and leverage is relevant in this context. Stretch is a misfit between resources and aspirations. Leverage concentrates, accumulates, conserves and recovers resources so that a meagre resource base can be stretched. Leverage reduces the stretch and focuses mainly on efficient utilization of resources. The strategic fit matches organizational resources and environment. This positions the firm by assessing organizational capabilities and environmental opportunities. Under fit, the strategic intent would seem to be more realistic. It is hierarchy of intentions ranging from a board vision through mission and purpose down to specific objectives.
M 1 - Appendix
FEW DEFINITIONS
Business Definition : It explains the business of an organization in terms of customer needs, customer groups and alternative technologies. Core Purpose : It is the reason for organizations existence. Core Values : It is the essential and enduring character of organization. Goals : A broad category of financial and non financial issues that a firm sets for itself. Mission : It is the social reasoning of organization. It links organization to society. Objectives : What is to be achieved in a given time period. They are the manifestation of goals. Strategic Intent : It makes clear what an organization stands for. Vision : What an organization wishes to achieve in the long run.
M 1 - Appendix
RELIANCE TECHNOLOGY CENTRE Reliance Industries Limited is the largest private sector in India and is the second largest manufacturer of polyester in the world. Reliance Technology Centre was set up in 1997 and presently is engaged in manufacturing PET homo and co-polymer fibres. The following is the vision and mission of the company. VISION To establish a centre of excellence for research and development in PET homo and copolymer fibres and resins through disciplined, motivated and time bound execution of projects; To create an environment conducive to intellectual growth, efficient flow of information and accountability in order to achieve a productive and sustained phase of research activities; To closely interact with the business group companies and technical for short, medium and long-term quality and process issues; To thrive to become a catalyst to the growth of companys polyester business; To leverage synergy between Reliances PET, polymers and fibre intermediate business; To create, maintain and pursue strategic research alliance for top end research activities. MISSION To achieve Global leadership in polymers, fibres and resin businesses.
Module 2
External Assessment, Competitive Analysis (1 of 3)
44
M2 - External Assessment, Competitive Analysis

2.1 External audit 2.2 PEST Analysis 2.3 Porters five forces model & Industry Analysis 2.4 McKinseys 7 S framework
45
M 2.1 External audit
Prediction is very difficult, especially about the future : Neils Bohr External Strategic Management Audit also called
Environmental scanning Industry analysis
External Audit:
Identification and evaluation of trends and events beyond control of single firm
Increased foreign competition Populations shifts Aging society Information technology Computer revolution
M 2.1 External audit (Contd) Purpose of external audit is development of Finite List of 1. Opportunities 2. Threats to be avoided Key External Forces 5 broad categories or PEST or PESTEL Analysis Framework
1. 2. 3. 4. 5.
Economic forces Social, cultural, demographic & environmental forces Political, governmental, and legal forces Technological factors Competitive forces
M 2.1 External audit (Contd)

Relationships Between Key External Forces and an Organization
Key External Forces
Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor Unions Special Interest Groups Products Services
Opportunities & Threats
M 2.2 PEST Analysis
Performing an External Audit

Gather competitive intelligence on factors:
Social Cultural Demographic Environmental Economic Political, legal, governmental technological
M 2.2 PEST Analysis(Contd)

Sources of information include:
Internet Libraries (corporate, university, public) Suppliers Distributors Customers Competition
Key factors:
Vary over time Vary by industry
M 2.2 PEST Analysis (Contd)

Variables include:
Market share Breadth of competing products World economies Foreign affiliates Proprietary account advantages Price competitiveness Technological advancements Interest rates Pollution abatement
Key External Factors:
1. 2. 3. 4.

Oriented to long-term & annual objectives Measurable Applicable to all competing firms Hierarchical
Overall company Divisional or functional areas
Economic Forces
Monitor Key Economic Variables:

Availability of credit Level of disposable income Interest rates Inflation rates Money market rates Federal government budget deficits Gross domestic product trend Consumption patterns

Unemployment trends Worker productivity levels Value of the dollar in world markets Stock market trends Foreign countries economic conditions Import/export factors Demand shifts for goods/services Income differences by region/customer
Price fluctuations Exportation of labor & capital Monetary policies Fiscal policies Tax rates ECC policies OPEC policies LDC policies
Social, Cultural, Demographic & Environmental Forces
Major impact on:

Products Services Markets customers
Consider:
United States
Population growing older Less Caucasian Gap between rich and poor widening 65 and older will rise to 18.5% of population by 2025 By 2075, no racial or ethnic majority
World population > 6 billion

U.S. population < 300 million
Great potential for domestic production expansion to other markets
Domestic only is a risky strategy
NAFTA
U.S. exports to Mexico increased 170% 2000, U.S. trade deficits:
Mexico -- $25 billion China -- $84 billion Japan -- $81 billion > 60,000 laid off along Mexico Border with U.S.
2001 Recession (U.S. and World)
Trends for the 2000s

More educated consumers Population aging Minorities more influential Local rather than federal solutions Fixation with youth decreasing Hispanics increase to 15% by 2021 African Americans increase to 14% by 2021
Module 2
61
Key variables

Childbearing rates Number of special-interest groups Number of marriages Number of divorces Number of births Number of deaths Immigration & emigration rates
Monitor Key Variables

Life expectancy rates Per capita income Attitudes toward business Average disposable income Buying habits Ethical concerns Attitudes toward saving
Monitor Key Variables

Racial equality Average level of education Government regulation Attitudes toward customer service Attitudes toward product quality Energy conservation Social responsibility Value placed on leisure time Recycling Waste management Air & water pollution Ozone depletion Endangered species
Political, Govt., & Legal Forces
Government Regulation
Key opportunities & key threats Antitrust legislation (Microsoft) Tax rates Lobbying efforts Patent laws Increasing Global Interdependence
Impact of political variables
Formulation of Strategies Implementation of Strategies Increasing Global Interdependence
Strategists in a global economy

Forecast political climates Legalistic skills Diverse world cultures
Globalization of Industry
Worldwide trend toward similar consumption patterns Global buyers & sellers E-commerce Instant transmission of money & information across continents

Key Political, govt., & legal variables:

Government regulation/deregulation Tax law changes Special tariffs Political Action Committees (PACs) Voter participation rates Number of patents Changes in patent laws Environmental protection laws Equal employment legislation Level of government subsidies Antitrust legislation/enforcement Sino-American relationships Russian-American relationships European-American relationships
Key Political, Government & Legal Variables
African-American relationships Import-export regulations Monetary policy Political conditions in other countries Government budgets World oil, currency, & labor markets Location and severity of terrorist activities
Technological Forces
Revolutionary technological forces:
Profound impact on organizations

Internet Semiconductors XML technologies UWB communications
Technological Forces
Internet changes the nature of opportunities and threats Alters life cycle of products Increases speed of distribution Creates new products and services Eases limitations of geographic markets Alters economies of scale Changes entry barriers Capitalizing on Information Technology (IT) Chief Information Officer (CIO)
Chief Technology Officer (CTO)
Technology-based issues
Underlie nearly every strategic decision
Competitive Forces
Collection and evaluation of information on competitors is essential for successful strategy formulation
Competition in virtually all industries can be described as intense. Identifying rival firms

Strengths Weaknesses Capabilities Opportunities Threats Objectives Strategies
Competitive Forces
Key Questions About Competitors: Their strengths Their weaknesses Their objectives and strategies Their responses to all external variables (e.g. social, political, demographic, etc.) Their vulnerability to our alternative strategies Our vulnerability to successful strategic counterattack Our product and service positioning relative to competitors Entry and exit of firms in the industry Key factors for our current position in industry Sales and profit rankings of competitors over time Nature of supplier and distributor relationships The threat of substitute products or services
Competitive Forces
Sources of Corporate Information:
Moodys Manuals Standard Corporation Descriptions Value Line Investment Surveys Duns Business Rankings Standard & Poors Industry Surveys Industry Week Forbes, Fortune, Business Week
Competitive Forces
7 Characteristics of most competitive U.S. firms:
1. 2.
3.
4. 5. 6. 7.
Market share matters Understand what business you are in Broke or not, fix it Innovate or evaporate Acquisition is essential to growth People make a difference No substitute for quality
Competitive Forces
Competitive Intelligence Programs:
Systematic and ethical process for gathering and analyzing information about the competitions activities and general business trends to further a business own goals.
Module 2
76
M 2.3 Porters five forces model & Industry Analysis
Competitive Analysis: Porters Five-Forces Model

Potential development of substitute products
Bargaining power of suppliers
Rivalry among competing firms
Bargaining power of consumers
Potential entry of new competitors
Competitive Analysis: Porters Five-Forces Model

The five forces framework developed by Michael Porter is the most widely known tool for analyzing the competitive environment, which helps in explaining how forces in the competitive environment shape strategies and affect performance. These five forces are not independent of each other. Pressures from one direction can trigger off changes in another which is capable of shifting sources of competition.
1) Threat of New Entrants Entry of a firm in and operating in a market is seen as a threat to the established firms in that market. The competitive position of the established firms is affected because the entrants may add new production capacity or it may affect their market shares. They may also bring additional resources with them which may force the existing firms to invest more than what was not required before. Altogether the situation becomes difficult for the existing firms if not threatening always and therefore they resort to raising barriers to entry. These barriers are intended to discourage new entrants and this may be done by organizations, be in any one or more ways, as discussed below:
a) Capital Requirements: High investments required for a start up in any business is another deterrent for new entrants bringing down the possibility of increased Competition.
Competitive Analysis: Porters Five-Forces Model (Contd)

b) Economies of Scale: Firms which operate on a large scale get benefits of lower cost of production because of the economies of scale. Since the new firm normally would start its operation at a smaller scale and therefore will have a relatively higher cost of production, its competitive position in the industry gets adversely affected. This barrier created through large scale of operation is not only applicable for production side but it can be extended to advertising, marketing, distribution, financing, after sales customer service, raw materials, purchasing and Research and Development as well. For example, you would have noticed in durable industry the kind of investments which players like Samsung and LG do on advertising and promotions normally and specially during events like World Cup cricket match. This makes it nearly impossible for any new third player to launch and sustain such intensive and investment driven marketing attack. c) Learning or Experience Effect: The theory explaining the experience curve or the learning curve suggests that as firms produce they grow more efficient and this brings them cost benefits. The efficiency levels achieved is an outcome of the experience, which teaches the organization better ways of doing things. This again keeps any new entrant at a disadvantage. d) Cost Disadvantage Independent of Scale: New entrants may face disadvantages which are independent of the operations. It may be on account of the lack of proprietary product knowledge such as patents, favourable access to raw material, favourable locations, existing plants built and equipped years earlier at lower costs, lower borrowing costs etc. e) Brand benefits: Buyers are often attached to established brands. Differences in physical or mere perceived value make existing products unique and the new entrants have to tire out to beat such brands and change the mindset of the customers.

f) Switching Costs: Switching costs, which is nothing but the expenses (financial or psychological) which a customer incurs in switching from one seller to another. Cases where such an expense is higher, new entrants find it difficult to establish or survive. Such costs may be because of a strong brand association or the comfort level a customer may be enjoying or it may be on account of a particular technology like Windows operating systems which most customers use and therefore will find it inconvenient to switch to a system like LINUX so easily. g) Access to Distribution Channel: Any such critical activity like distribution channel in the business can be a barrier for the entrants when accessibility to them is found to be difficult. Most existing firms in FMCG industry are found to have a strong favourable distribution channels which is very difficult to penetrate. For example in India you can think of HLL which commands a deeply entrenched distribution network. h) Anticipated Growth: Incumbents in a rapidly growing market are less likely to respond to a new entrant when the markets growth offers enough opportunities to share. But a new entrant position will be opposite in a slowly growing market. In addition to the above, few general entry barriers exist in each industrys case, for example, regulatory policies, tariffs and international trade restrictions are few such additional factors.

2) Bargaining Power of Suppliers Business organizations have a large dependency on suppliers and the latter influence their profit potential significantly. Suppliers decisions on prices, quality of goods and services and other terms and conditions of delivery and payments have significant impact on the profit trends of an industry. However, suppliers ability to do all these depends on the bargaining power over buyers. Suppliers bargaining power would normally depend on a) Importance of the Buyer to the Supplier Group: The size of the supplies taken by a particular buyer is likely to put the buyers in a relatively advantageous position. The same may be found true if the supplier tends to get an image advantage by supplying to a particular firm. Consequently in dealing with such buyers, suppliers bargaining power is naturally reduced. Just opposite happens when buyer is not so important to the supplier and the latter then is less likely to offer favourable terms to win or retain the customer. b) Importance of the Suppliers Product to Buyers: Here the position may just be opposite of the above situation where suppliers have a better bargaining power coming from their sheer size or image. c) Greater Concentration Among Suppliers than among Buyers: An industry, which is largely dominated by a few large firms is a highly concentrated industry. Such few firms hold greater power with them as the proportion of the industrys total output is in hands of such large firms. This gives such firms greater power over those who do business with them. The converse is true when industry has low concentration in suppliers. A higher concentrated supplier position may be possible on account of the sources of raw materials available, R & D or patent rights available with fewer firms.

2) Bargaining Power of Suppliers (Contd) d) High Switching Costs for Buyers: In this case buyers suffer because of the suppliers advantageous position or by the nature of supplies itself, the buyers have to face a higher switching cost. e) Credible Threat of Forward Integration by Suppliers: Suppliers in a given situation may see an opportunity in moving up the value chain and may seriously think of getting into the business of what its buyers have been doing till now. Any indication of that nature from supplier side puts the buyers at the receiving end as they feel threatened because of a new player in that market and of losing an assured source of supplies. A recent example may be of Reliance which has decided to move from exploration and refining of oil to selling of oil through its own retail petrol pumps.

3) Bargaining Power of Customers Customers with a stronger bargaining power relative to their suppliers may force supply prices down or demand better quality for the same price and may demand more favourable terms of business. For instance, there will always be a difference in the bargaining power between an individuals buying different construction material like cement, steel or bricks and a real estate builder buying them for the number of properties he may have been building over so many years. Few of the following facts attach greater power to buyers: a) Undifferentiated or Standard Supplies: A supplier, given the nature of products it supplies, may have a very limited choice in providing any differentiated products and this enables a customer to get the deal at the most favourable terms. In a perfectly competitive market situations with large number of suppliers, prices automatically are at their lowest. b) Customers Price Sensitivity: Customers buying behaviour vary with respect to their sensitivity to prices. Depending on how important the item is for the customers usage and proportion he may be spending on the item concerned, buyers sensitivity to price varies. Any customer with high price sensitivity gains advantage in its bargaining power. c) Accurate Information about the Cost Structure of Suppliers: A more informed customer is capable of negotiating with suppliers. Whenever such customers notice a decline in the suppliers costs they would always bargain for a proportional decrease in price. This aspect is more relevant in todays context of global markets where cost benefits can come from anywhere in the world at any point in time for various reasons. There may be a general decline in prices of a product in world market because of a glut situation or somewhere some new discoveries may

3) Bargaining Power of Customers (Contd) d) Greater Concentration in Buyers Industry than in Suppliers Industry and Relatively large Volume Purchase: This means that buyers are large and more powerful than suppliers. Government departments like police department when negotiating for large orders of security weapons or intelligence equipments will necessarily command a greater hold than its supplier as there will be only few number of such institutions buying them at a given point of time. e) Credible threat of Backward Integration by Buyers: Different from forward integration which suppliers tend to attempt at, buyers in order to hold their position stronger in the market may integrate in backward manner. This will mean that the buyer extends itself to the previous stage of manufacturing or distribution for which it had been dependent on suppliers till now. An example could be of an entertainment channel which airs programmes outsourced from organizations producing them outside, get into the business of producing its programmes in house.

4) Threat of Substitutes Often firms in an industry face competition from outside industry products, which may be close substitutes of each other. For example, with the new technologies in place now the electronic publishing are the direct substitutes of the texts published in print. Similarly, newspaper find their closest substitutes in their online version, though it may be a smart strategic move to position them as complementary products. However, the competitive pressure, which any industry may face, depends primarily on three factors: 1) whether the substitutes available are attractively priced; 2) whether buyers view substitutes available as satisfactory in terms of their quality and performance; 3) how easily buyers can switch to substitutes. Generally it is observed that the availability and acceptability of substitutes determine an upper price limit to a product. When relative prices of the product in question rise above that of the substitute products, customers tend to switch away from them.

5) Competitive Rivalry The level of rivalry is minimum in a perfectly competitive market where there are large number of buyers and sellers and the product is uniform with everyone. Same is true for a monopoly market where there is only one player and the type of product is also one. However in case of oligopoly or monopolistic competition, where you will find few players and the market conditions allow them to differentiate their products and services, competition if found to be fierce. Few of the following factors explain the level of rivalry: a) The Stability of Environment: An unstable environment is likely to call for a hyper-competitive situation and of the several factors that affect stability could be technological innovation, changes in government regulations, customers profile and their needs. In an industry which witnesses high movements in terms of entry or exit, the rules of the game may change too frequently. One of such instances of fierce competition could be noticed on account of the onslaught of new technologies like CDMA affecting the general environment of telecom industry in India. The entry of Reliance India Mobile with CDMA technology intensified the rivalry between telecom players to such an extent that the government had to intervene through its institution, Telecom Regulatory Authority of India (TRAI). b) The Life Expectancy of Competitive Advantage: There are industries for example consumer electronics or white goods in which the fruits of innovations do not last longer and hence the companies do not even bother to patent them. This has an adverse implication for the stability of the competitive environment leading to intense rivalry. Length of innovation cycle, patent protection or switching costs between rivals are few factors, which may impact the life expectancy of competitive advantage.

5) Competitive Rivalry (Contd) c) Characteristics of the strategies pursued by competitors: This also has or may have an impact on the general approach to rivalry. For example, in a market segmented approach on part of the competitor leads to lesser rivalry situation. Also the kind of goals, which competitors pursue has an impact on the rivalry. Competitors pursuing the goal of increased market share will lead to increased rivalry again. Lastly, few implications can be picked up from the five forces framework itself. Lower threats to entry or a higher possibility for substitutes have the potential of increasing rivalry. A lower engagement between supplier will result into a lesser rivalry. So will be the effect when buyers face higher switching costs. In an overall assessment, two critical observations regarding rivalry can be made here. First a powerful competitive strategy employed by one rival can greatly intensify the competitive pressure on other rivals. Second, the frequency and rigor with which rivals use any or all competitive weapons at their disposal can be a major determinant of whether the competitive pressures associated with rivalry are cutthroat, fierce, strong, moderate or weak.
M 2.3 Porters five forces model & Industry Analysis (Contd)
Global Challenge International Challenge faced by Indian firms: 1. Import oriented companies
Rupee Dollar Fluctuation Maintain competitive edge despite imports
2. Purely domestic market oriented companies Export oriented companies
How to gain and maintain exports to other nations
How to defend domestic markets against imported goods
Industry Analysis (EFE)
External Factor Evaluation Matrix Summarize & evaluate:

Economic
Social Demographic Environmental Governmental Technological
Cultural
Political
Competitive
Five-Step process:
List key external factors (10-20) Opportunities & threats Assign weight to each (0 to 1.0) Sum of all weights = 1.0 Assign 1-4 rating to each factor Firms current strategies response to the factor Multiply each factors weight by its rating Produces a weighted score Sum the weighted scores for each Determines the total weighted score for the organization. Highest possible weighted score for the organization is 4.0; the lowest, 1.0. Average = 2.5
Opportunities
USTKey External Factors Weight .15 Rating
Weighted score
Global markets untapped Increased demand Astronomical Internet growth Pinkerton leader in discount market More social pressure to quit smoking
1 3 1 4 3 2 3 2 2
.15 .15 .05 .60 .30 .20 .15 .10 .20
.05 .05 .15 .10 .10 .05 .05 .10
Threats
Legislation against the tobacco industry Production limits on tobacco Smokeless market SE region U.S. Bad media exposure from FDA
Clinton Administration
TOTAL
.20
1.00
.20
2.10

Total weighted score of 4.0 = Organization response is outstanding to threats & weaknesses Total weighted score of 1.0 = Firms strategies not capitalizing on opportunities or avoiding threats
UST (in the previous example), has a total weighted score of 2.10 indicating that the firm is below average in its effort to pursue strategies that capitalize on external opportunities and avoid threats.
Important
Understanding of the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.
Competitive Profile Matrix (CPM)
Identifies firms major competitors and their strengths & weaknesses in relation to a sample firms strategic position
CPM
Critical Success Factor Advertising
Avon
LOreal
P&G
Weight Rating Score Rating Score Rating Score
0.20
0.20
0.80
0.60
Product Quality
Price Competition Management Financial Position Customer Loyalty Global Expansion Market Share Total
0.10
0.10 0.10 0.15 0.10 0.20 0.05
4
3 4 4 4 4 1
0.40
0.30 0.40 0.60 0.40 0.80 0.05
4
3 3 3 4 2 4
0.40
0.30 0.30 0.45 0.40 0.40 0.20
3
4 3 3 2 2 3
0.30
0.40 0.30 0.45 0.20 0.40 0.15
1.00
3.15
3.25
2.80
ADDITIONAL INFORMATION SLIDES

95
M 2.4 Mckinseys 7S framework
M 2.4 Mckinseys 7S framework The PESTEL checklist can be used to analyze which factors in the environment are helpful to the unit, and which may impede progress of the unit in , achieving its aims. There is of course a danger, common to all checklists, that once an entry has been made under each of the headings it is deemed complete, regardless of whether or not the list reflects the complexity of the reality. Another common error in the implementation is that 'boxes' are completed without reference to the aims of the organization. This can lead to considerable expenditure of time and energy for little benefit.
Let us now discuss in brief Mckinsey's 7s framework. According to Waterman et al., organizational challenges is not only a matter of structure, although structure is a significant variable in the management of change. When we talk of an effective organizational change, we can see that it is a complex relationship between strategy, structure, systems, staff, style, shared values, skills and super ordinate goals. This relationship is represented ill a pictorial manner . The framework suggests that there is a multiplicity of factors that influence an organizations ability to change and its proper mode of change. Because of the interconnectedness of the variables, it would be difficult to make significant progress in one area without making progress in the others as well. There is no starting point or implied hierarchy in the shape of the diagram, and it is not obvious which of the seven factors would be the driving force in changing a particular organization at a certain point in time. The critical variables would be different across organizations and in the same organization at different points of time.
M 2.4 Mckinseys 7S framework In this context there may be a role for using 'McKinsey's 7s Framework' helping a Client , structure the analysis. Let us first discuss the concept of McKinsey's 7s framework in brief: Superordinate Goals: are the fundamental ideas around which a business is built; Structure: Salient features of the unit's organizational chart (e.g. degree of hierarchy, presence of internal market, extent of centralization/decentralization) and interconnections with the office; Systems: procedures and routine processes, including how information flows around the unit; Staff: Personnel categories within the unit and the use to which staff are put, skill base, etc.; Style: Characterization of how key Managers behave in order to achieve the unit's goals; Shared Values Strategy: The significant meanings or guiding concepts that the unit imbues on its members; Skills: Distinctive capabilities of key personnel and the unit as a whole. The 7s model can be used in two ways: Considering the links between each of these one can identify strengths and weaknesses of an organization. No S is strength or a weakness in its own right; it is only its degree of support, or otherwise, for the other which is relevant. Anything that harmonizes with all the other Ss can be thought of as strengths and weaknesses. The model highlights how a change made in any one of these will have an impact on all the others. Thus if a planned change is to be effective, then changes in one must be accompanied by complementary changes in the others.

Competitive Intelligence It is the information which is relevant to strategy formulation regarding the environmental context within which a firm competes. Such intelligence has several uses: a) Providing description of the competitive environment that inform strategist and guide strategy formulation; b) Challenge common assumption about the competitive environment; c) Forecasting future development in the competitive environment; d) Identifying and compensating for exposed competitive weaknesses; e) Determining when a strategy is no longer viable or sustainable; f) Indicating when and how strategy should be adjusted to changing competitive environment.
Module 3
Internal Assessment (1 of 2)
102
M3 - Internal Assessment
Internal audit Company analysis Integrating Strategy and Culture Value Chain Analysis Internal factor Evaluation analysis, Benchmarking
103
M 3.1 Internal audit Nature of an Internal Audit : Basis for Objectives & Strategies
Internal strengths/weaknesses External opportunities/threats Clear statement of mission
Parallels process of external audit

Information from: Management Marketing Finance/accounting Production/operations Research & Development Management Information Systems
External Analyses Outcomes
Opportunities and threats
By studying the external environment, firms identify what they might choose to do.
Internal Analyses Outcomes

Unique resources, capabilities, and competencies
(required for sustainable competitive advantage)
By studying the internal environment, firms identify what they can do
The Context of Internal Analysis

Global Economy
Traditional sources of advantages can be overcome by competitors international strategies and by the flow of resources throughout the global economy.
Global Mind-Set
The ability to study an internal environment in ways that are not dependent on the assumptions of a single country, culture, or context.
Analysis Outcome
Understanding how to leverage the firms bundle of heterogeneous resources and capabilities.
Creating Competitive Advantage

Core competencies, in combination with product-market positions, are the firms most important sources of competitive advantage. Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies.
Competitive Advantage
Firms achieve strategic competitiveness and earn above-average returns when their core competencies are effectively:
Acquired. Bundled. Leveraged.
Over time, the benefits of any value-creating strategy can be duplicated by competitors.
Competitive Advantage (contd)

Sustainability of a competitive advantage is a function of:
The rate of core competence obsolescence due to environmental changes. The availability of substitutes for the core competence. The difficulty competitors have in duplicating or imitating the core competence.
The Challenge of Internal Analysis

Strategic decisions in terms of the firms resources, capabilities, and core competencies:
Are non-routine. Have ethical implications. Significantly influence the firms ability to earn above-average returns.
3111
The Challenge of Internal Analysis (contd)

To develop and use core competencies, managers must have:
Courage Self-confidence Integrity The capacity to deal with uncertainty and complexity
A willingness to hold people (and themselves) accountable for their work

3112
Components of Internal Analysis Leading to Competitive Advantage and Strategic Competitiveness
Resources
Resources
Are a firms assets, including people and the value of its brand name. Represent inputs into a firms production process, such as:
Capital equipment Skills of employees Brand names Financial resources Talented managers
Types of Resources
Tangible resources
Financial resources Physical resources Technological resources Organizational resources
Intangible resources
Human resources
Innovation resources
Reputation resources
Resources, Capabilities and Core Competencies
Capabilities
Discovering Core Competencies Represent the capacity to deploy resources that have been purposely integrated to achieve a desired end state Emerge over time through complex interactions among tangible and intangible resources Often are based on developing, carrying and exchanging information and knowledge through the firms human capital
Core Competencies
Capabilities
Resources
Tangible Intangible
Capabilities (contd)
Discovering Core Competencies
The foundation of many capabilities lies in:

The unique skills and knowledge of a firms employees The functional expertise of those employees
Core Competencies
Capabilities
Resources
Tangible Intangible
Capabilities are often developed in specific functional areas or as part of a functional area.
Examples of Firms Capabilities

Functional Areas Distribution Human resources Management information systems Marketing Capabilities Effective use of logistics management techniques Motivating, empowering, and retaining employees Effective and efficient control of inventories through point-of-purchase data collection methods Effective promotion of brand-name products Effective customer service Innovative merchandising Ability to envision the future of clothing Effective organizational structure Design and production skills yielding reliable products Product and design quality Miniaturization of components and products Innovative technology Development of sophisticated elevator control solutions Rapid transformation of technology into new products and processes Digital technology
Management Manufacturing
Research & development

Four criteria for determining strategic capabilities:

Value
Core Competencies
Rarity
Costly-to-imitate Non substitutability
Capabilities
Resources
Tangible Intangible
Core Competencies
Resources and capabilities that are the sources of a firms competitive advantage:
Distinguish a company competitively and reflect its personality. Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities.
Core Competencies
Capabilities
Resources
Tangible Intangible
Core Competencies
Core Competencies
Activities that a firm performs especially well compared to competitors. Activities through which the firm adds unique value to its goods or services over a long period of time.
Capabilities
Resources
Tangible Intangible
Building Core Competencies

Four Criteria of Sustainable Competitive Advantage

Valuable capabilities
Four Criteria of Sustainable Advantages
Rare capabilities
Costly to imitate Non substitutable
Valuable Rare Costly to imitate Nonsubstitutable
TABLE 3.4
The Four Criteria of Sustainable Competitive Advantage
Valuable Capabilities Rare Capabilities Costly-to-Imitate Capabilities
Help a firm neutralize threats or exploit opportunities Are not possessed by many others Historical: A unique and a valuable organizational culture or brand name Ambiguous cause: The causes and uses of a competence are unclear Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers
Nonsubstitutable Capabilities
No strategic equivalent
Building Sustainable Competitive Advantage

Valuable capabilities
Help a firm neutralize threats or exploit opportunities.
Rare capabilities
Are not possessed by many others.
Building Sustainable Competitive Advantage Capabilities Costly-to-Imitate

Historical
A unique and a valuable organizational culture or brand name
Ambiguous cause
The causes and uses of a competence are unclear
Social complexity
Valuable Rare Costly to Imitate Nonsubstitutable
Interpersonal relationships, trust, and friendship among managers, suppliers, and customers
Building Sustainable Competitive Advantage

Nonsubstitutable Capabilities
No strategic equivalent
Firm-specific knowledge
Organizational culture
Superior execution of the chosen business model
Resource Based View (RBV)

Approach to Competitive Advantage
Internal resources are more important than external factors
Tangible Resources
Financial Resources Organizational Resources The firms borrowing capacity The firms ability to generate internal funds The firms formal reporting structure and its formal planning, controlling, and coordinating systems Sophistication and location of a firms plant and equipment Access to raw materials Stock of technology, such as patents, trademarks, copyrights, and trade secrets
Physical Resources
Technological Resources
Intangible Resources
Human Resources Knowledge Trust Managerial capabilities Organizational routines Ideas Scientific capabilities Capacity to innovate Reputation with customers Brand name Perceptions of product quality, durability, and reliability Reputation with suppliers For efficient, effective, supportive, and mutually beneficial interactions and relationships
Innovation Resources
Reputational Resources
Module 3
Internal Assessment (2 of 2)
129

Three All Encompassing Categories
1. Physical resources
2. Human resources
3. Organizational resources

Empirical Indicators
Rare
Hard to imitate
Not easily substitutable
Management
Function Planning Organizing Motivating Staffing Controlling Stage When Most Important
Strategy Evaluation
Managerial Questions Checklist

Does the firm use strategic-management concepts? Are company objectives and goals measurable and well communicated? Do managers at all hierarchical levels plan effectively? Do managers delegate authority well? Is the organizations structure appropriate? Are job descriptions and specifications clear? Is employee morale high? Are employee turnover and absenteeism low? Are organizational reward and control mechanisms effective?
Marketing
Customer Needs/Wants for Products/Services
1. Defining 2. Anticipating
3. Creating
4. Fulfilling
Marketing
Marketing Functions
1. Customer analysis
2. Selling products/services 3. Product & service planning
4. Pricing
5. Distribution 6. Marketing research 7. Opportunity analysis
Marketing Audit Checklist

Are markets segmented effectively? Is the organization positioned well among competitors? Has the firms market share been increasing? Are present channels of distribution reliable and cost-effective? Does the firm have an effective sales organization? Does the firm conduct market research? Are product quality and customer service good? Are the firms products and services priced appropriately? Does the firm have an effective promotion, advertising, and publicity strategy? Are marketing planning and budgeting effective? Do the firms marketing managers have adequate experience and training?
Finance/Accounting
Finance/Accounting Functions
1. Investment decision (Capital budgeting) 2. Financing decision 3. Dividend decision 4. Financial analysis Key financial ratios
Accounting Audit Checklist

Where is the firm financially strong and weak as indicated by financial ratio analysis? Can the firm raise needed short-term capital? Can the firm raise needed long-term capital through debt and/or equity? Does the firm have sufficient working capital? Are capital budgeting procedures effective? Are dividend payout policies reasonable? Does the firm have good relations with its investors and stockholders? Are the firms financial managers experienced and well trained?
Liquidity ratios measure a firms ability to meet maturing short-term obligations.
Accounting Ratios
How has each ratio changed over time? 2. How does each ratio compare to industry norms? 3. How does each ratio compare with key competitors? BNI
Current ratio Quick (acid-test) ratio

Leverage ratios measure the extent to which a firm has been financed by debt.
Debt-to-total-assets ratio Debt-to-equity ratio Long-term debt-to-equity ratio Times-interest-earned (coverage) ratio
Activity ratios measure how effectively a firm is using its resources.
Inventory turnover Fixed assets turnover Total assets turnover Accounts receivable turnover Average collection period
Profitability ratios measure managements overall effectiveness as shown by returns generated on sales and investment.
Gross profit margin Operating profit margin Net profit margin Return on total assets Return on stockholders equity Earnings per share Price-earnings ratio
Growth ratios measure the firms ability to maintain its economic position in the growth of the economy and industry.
Sales Net income Earnings per share Dividends per share
Production/Operations
Production/Operations Functions
Process Capacity
Inventory
Workforce Quality
Production/Operations Audit Checklist

Are suppliers of raw materials, parts, and subassemblies reliable and reasonable? Are facilities, equipment, machinery, and offices in good condition? Are inventory-control policies and procedures effective? Are quality-control policies and procedures effective? Are facilities, resources, and markets strategically located? Does the firm have technological competencies?
Research & Development

Research & Development Functions
Development of new products before competitors Improving product quality Improving manufacturing processes to reduce costs
R&D Audit Checklist of Questions

Does the firm have R&D facilities? Are they adequate? If outside R&D firms are used, are they cost effective? Are the organizations R&D personnel well qualified? Are R&D resources allocated effectively? Are management information and computer systems adequate? Is communication between R&D and other organizational units effective? Are present products technologically competitive?
Management Information Systems
Information Systems CIO/CTO Security User-friendly E-commerce
Information Systems Audit Checklist

Do all managers in the firm use the information system to make decisions? Is there a chief information officer or director of information systems position in the firm? Are data in the information system updated regularly? Do managers from all functional areas of the firm contribute input to the information system? Are there effective passwords for entry into the firms information system? Are strategists of the firm familiar with the information systems of rival firms? Is the information system user friendly? Do all users of the information system understand the competitive advantages that information can provide firms? Are computer training workshops provided for users of the information system? Is the firms information system continually being improved in content and user-friendliness?
Integrating Strategy & Culture

Organizational Culture
Pattern of behavior developed by an organization as it learns to cope with its problem of external adaptation and internal integrationis considered valid and taught to new members
Integrating Strategy & Culture

Values Legends Beliefs
Heroes
Cultural Products
Rites
Symbols
Myths
Rituals
Outcomes from Combinations of the Four Criteria

Competitive Consequences
No No No No Competitive Disadvantage Competitive Parity Temporary Competitive Advantage
Performance Implications
Below Average Returns Average Returns Above Average to Average Returns
Yes Yes
No Yes
No No
Yes/ No Yes/ No
Yes
Yes
Yes
Yes
Sustainable Competitive Advantage
Above Average Returns
Outcomes from Combinations of the Criteria for sustainable Competitive Advantage
Creating Value
By exploiting their core competencies or competitive advantages, firms create value. Value is measured by:
Product performance characteristics
Product attributes for which customers are willing to pay
Firms create value by innovatively bundling and leveraging their resources and capabilities. Superior value Above-average returns
Value Chain Analysis

Allows the firm to understand the parts of its operations that create value and those that do not. A template that firms use to:
Understand their cost position. Identify multiple means that might be used to facilitate implementation of a chosen businesslevel strategy.
Value Chain Analysis (contd)

Primary activities involved with:
A products physical creation
A products sale and distribution to buyers
The products service after the sale
Support Activities
Provide the assistance necessary for the primary activities to take place.
Value Chain Analysis (contd)

Value Chain
Shows how a product moves from the rawmaterial stage to the final customer.
To be a source of competitive advantage, a resource or capability must allow the firm:

To perform an activity in a manner that is superior to the way competitors perform it, or
To perform a value-creating activity that competitors cannot complete
The Basic Value Chain
Examining the Value-Creating Potential of Primary Activities

Inbound Logistics
Activities, such as materials handling, warehousing, and inventory control, used to receive, store, and disseminate inputs to a product.
Operations
Activities necessary to convert the inputs provided by inbound logistics into final product form. Machining, packaging, assembly, and equipment maintenance are examples of operations activities.
Outbound Logistics
Activities involved with collecting, storing, and physically distributing the final product to customers. Examples of these activities include finished goods warehousing, materials handling, and order processing.
Marketing and Sales

Activities completed to provide means through which customers can purchase products and to induce them to do so. To effectively market and sell products, firms develop advertising and promotional campaigns, select appropriate distribution channels, and select, develop, and support their sales force.
Service
Activities designed to enhance or maintain a products value. Firms engage in a range of service-related activities, including installation, repair, training, and adjustment. Each activity should be examined relative to competitors abilities. Accordingly, firms rate each activity as superior, equivalent, or inferior.
Examining the Value-Creating Potential of Support Activities
Procurement
Activities completed to purchase the inputs needed to produce a firms products. Purchased inputs include items fully consumed during the manufacture of products (e.g., raw materials and supplies, as well as fixed assets machinery, laboratory equipment, office equipment, and buildings).
Technological Development
Activities completed to improve a firms product and the processes used to manufacture it. Technological development takes many forms, such as process equipment, basic research and product design, and servicing procedures.
Human Resource Management

Activities involved with recruiting, hiring, training, developing, and compensating all personnel.
Firm Infrastructure
Firm infrastructure includes activities such as general management, planning, finance, accounting, legal support, and governmental relations that are required to support the work of the entire value chain. Through its infrastructure, the firm strives to effectively and consistently identify external opportunities and threats, identify resources and capabilities, and support core competencies. Each activity should be examined relative to competitors abilities. Accordingly, firms rate each activity as superior, equivalent, or inferior.
The Value-Creating Potential of Primary Activities

Inbound Logistics
Activities used to receive, store, and disseminate inputs to a product
Operations
Activities necessary to convert the inputs provided by inbound logistics into final product form
Outbound Logistics
Activities involved with collecting, storing, and physically distributing the product to customers
The Value-Creating Potential of Primary Activities (contd)

Marketing and Sales
Activities completed to provide the means through which customers can purchase products and to induce them to do so.
Service
Activities designed to enhance or maintain a products value
Each activity should be examined relative to competitors abilities and rated as superior, equivalent or inferior.
The Value-Creating Potential of Primary Activities: Support

Procurement
Activities completed to purchase the inputs needed to produce a firms products.
Technological Development
Activities completed to improve a firms product and the processes used to manufacture it.
Human Resource Management

Activities involved with recruiting, hiring, training, developing, and compensating all personnel.
The Value-Creating Potential of Primary Activities: Support (contd)

Firm Infrastructure
Activities that support the work of the entire value chain (general management, planning, finance, accounting, legal, government relations, etc.)
Effectively and consistently identify external opportunities and threats Identify resources and capabilities Support core competencies
Each activity should be examined relative to competitors abilities and rated as superior, equivalent or inferior.
Figure 3.4
Prominent Applications of the Internet in the Value Chain
Source: Reprinted by permission of Harvard Business Review from Strategy and the Internet by Michael E. Porter, March 2001, p. 75. Copyright 2001 by the Harvard Business School Publishing Corporation; all rights reserved.
Module 4
Balanced Scorecard, Long term objectives, types of strategies
(1 of 3)
166
M4 - Balanced Scorecard, Long term objectives, types of strategies
4.1 Balanced Scorecard 4.2 Long term objectives formulating long term and grand strategic options 4.3 Generic Competitive Strategies and Situation Suitability 4.4 Defensive Strategies 4.5 Innovation, Integration and diversification 4.6 Tailoring Strategy 4.7 Strategic Mgt for NGOs & SMEs
167
Module 4
(2 of 3)
168
Module 4
(3 of 3)
169
Module 5
Strategic Analysis and Choices (1 of 2)
170
M5 - Strategic Analysis and Choices
5.1 Strategy Formulation framework 5.2 BCG and Ansoff Matrix 5.3 Product Portfolio Analysis 5.4 Value Curves 5.5 IE Matrix 5.6 Grand Strategy matrix 5.7 QSPM Quantitative Strategic Planning Matrix
171
Module 5
Strategic Analysis and Choices (2 of 2)
172
Module 6
(1 of 2)
173
M6 Strategy Implementation 6.1 Annual Objectives 6.2 Developing Functional Strategies 6.3 Developing and Communicating Concise policies 6.4 Resource Allocation 6.5 Managing Conflict 6.6 Matching Structure with Strategy 6.7 Managing Resistance to Change 6.8 Issues in Strategy Implementation, Strategy evaluation and Contingency Planning 6.9 Auditing
174
Module 6
(2 of 2)
175
Best of Luck
176
M5 : 5.4 Strategic Leadership Strategic Leadership is a persons ability to anticipate, envision, maintain flexibility, think strategically and work with others to initiate changes that will create a viable future for the organization. Org success is not a chance occurrence but determined primarily by the decisions strategic leaders make. It is a process of providing direction and inspiration necessary to create and implement a vision, a mission and strategies to achieve and sustain orgznl objectives. Top, middle and lower levels of orgzn are involved in strategic leadership but top mgt is held responsible for current performance as well as for creating conditions that will insure the orgzns survival in the future.
Complexity of environment and uncertainty of the future make the task of the strategic leader more difficult. They perform 4 primary responsibilities :1. Conceptualize the organizations vision, mission and core values 2. Oversee the formulation of objectives, strategies, policies and structures that translate vision, mission and core values into business decisions 3. Create an environment and culture for organizational learning and mutual exchange between individuals and groups 4. Serve as steward and role model for the rest
Strategic leadership ensures that the strategic management process is successfully 177 carried out and yields desired results for the organization.
Forces Influencing Design of Strategic Management Systems

Toward more formality and more details Toward less formality and fewer details
Organization
Small one-plant companies Large companies
Management Styles
Policy maker Democratic-permissive Authoritarian Day-to-day operational thinker Intuitive thinker Experienced in planning Inexperienced in planning
Forces Influencing Design of Strategic Management Systems (Contd)

Complexity of Environment
Stable environment Turbulent environment Little competition Many markets and customers Single market and customer Competition severe

Toward more formality and more details
Complexity of Production Process

Long production lead times Short production lead times Capital intensive Labor intensive Integrated manufacturing processes Simple manufacturing processes High technology Low technology Market reaction time for new product is short Market reaction time is long
Toward less formality and fewer details

Nature of Problems
Facing new, complex, tough problems having long-range aspects Facing tough short-range problems
Purpose of Planning System

Coordinate division activities Train managers

Strategic Management - V2

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Strategic Management - V2

Uploaded by

Copyright:

Available Formats

M1 - Introduction to strategic management

1.1 Strategic management basics

Basic general work flow diagram

Plan (why ? What ? when ?)

Implement (To achieve )

CLASS DISCUSSION ON EXAMPLES of this model

1.1 Strategic management basics (Contd)

M 1.3 Strategic Management Model (Contd)