Strategic Management

Introduction

Introduction
Strategic Management is considered as the process of formulating, implementing and evaluating strategies for an organization. Business Policy is a predetermined course of action that is established to guide the performance of work towards the organizations objectives.

Hierarchy of Strategic Intent

It refers to the purpose of the organization and the ends it wishes to pursue. Vision Mission Goals Objectives Plans

Cont..

Vision: It is a forward looking view of what an organization wishes to become in the year ahead. It is an image of how the organization sees itself. Mission: It is what an organization is and why it exists? (reason for existence) Goals: They denote what an organization hopes to accomplish in a future period of time. They represent the future state or outcome of effort put in now. Goals are generalized and may be qualitative. Objectives: They are the ends that state specifically how the goals shall be achieved. They are concrete and specific. It tends to be mainly qualitative in specifications. Plans: These are the statements of how objectives are to be accomplished. They indicate the specific actions that will be taken by the organization in order to achieve the objectives. Policies: These are the guidelines to decision making. Policies tell people what they may or may not do. Tactics: These are the specific short term action plans designed to implement policy decisions. Core values: They signify commonly held beliefs, mindsets and assumptions that shape how work is done in an organization.

Cont
Strategy: Strategy is the overall plan of a firm deploying its resources to establish a favorable position and compete successfully against its rivals. It chalks out a possible future, structures various internal and external processes and puts the firm on the right path in a dynamic world. A strategy does not indicate what is to be done in detail; it only provides a general programme of action, outlining the deployment of resources with a view to improve the chances of achieving selected objectives.

Cont..
Thus for gaining customers attention and business each firm tries to chalk out its own internal strengths and weaknesses in terms of , Which product or service to pursue Which investments to make Which human resource policy to implement Which organizational structure to adopt. The essence of strategy lies in striking a harmonious balance between a firms distinctive skills and capabilities and the external environment in which it operates.

Strategic Decision Making

Decision making is the process of selecting a course of action among many alternatives. Strategic decisions are the essence of strategic management. Strategic decisions by their nature are characterized by considerable risk and uncertainty. It involves more than one area of an organization.

Cont..
The features of strategic decisions vary with the level of strategic activity considered, like corporate level decisions are characterized by greater risk, cost, profit potential, greater need for flexibility and longer time horizon. Functional level decisions involve action oriented operational issues and are relatively short range and low risk. Business level decisions help bridge decisions at the corporate and functional level.

Dimensions of strategic decisions

Top management involvement Allocation of large doses of resources Effect of long term prosperity of the firm Future oriented Multi- functional or Multi business consequences Focus on external gaps.

Levels of strategy
There are three levels of strategy: 1. Corporate level 2. Business level (SBUs) 3. Functional level

Three Levels of Strategy in Organizations

Corporate-Level Strategy: What business are we in?
Corporation

Business-Level Strategy: How do we compete?

Textiles Unit Chemicals Unit

Auto Parts Unit

Functional-Level Strategy: How do we support the business-level strategy?

Finance

R&D

Manufacturing

Marketing

Corporate level
It is the process of defining the overall character and purpose of the organization, the business it will enter and leave and how resources will be distributed among those businesses. Strategy is developed by top management.

Business level
It is the planning process concerned primarily with how to manage the interests and operations of a particular unit with in the organization, commonly known as a strategic business unit ( SBU). A strategic business unit is a distinct business with its own set of competitors, that can be managed reasonably independently of other business with in the organization. Strategies at this level are aimed at deciding the competitive advantage to build, determining responses to changing market situations, allocating resources with in the business unit and coordinating functional level strategies developed by functional managers.

Functional level strategy

It is the process of determining policies and procedures for different functions of an enterprise like marketing, finance, personnel etc.

Role of strategies
Core competencies Developing synergy Creating value for customers.

Disscussion
Difference between strategy and plan?

Strategic Management Process

Scan External Environment National, Global Evaluate Current Mission, Goals, Strategies Scan Internal Environment Core Competence, Synergy, Value Creation

Identify Strategic Factors Opportunities, Threats Formulate Strategy Corporate, Business, Functional

SWOT

Identify Strategic Factors Strengths, Weaknesses

Implement Strategy via Changes in: Leadership culture, Structure, HR, Information & control systems

Environmental scanning
Organizational environment consists of both external and internal factors. Environment must be scanned so as to determine development and forecasts of factors that will influence organizational success. Environmental scanning refers to possession and utilization of information about occasions, patterns, trends, and relationships within an organizations internal and external environment. It helps the managers to decide the future path of the organization. Scanning must identify the threats and opportunities existing in the environment. While strategy formulation, an organization must take advantage of the opportunities and minimize the threats. A threat for one organization may be an opportunity for another.

Cont..
There are two main forces that determine the performance of a firm. 1. The industry environment, the firm operates in.( external) 2. The kind of resources/ skills and strategies the firm possess/ pursues. (internal)

Internal analysis
Internal analysis of the environment is the first step of environment scanning. Organizations should observe the internal organizational environment. This includes employee interaction with other employees, employee interaction with management, manager interaction with other managers, and management interaction with shareholders, access to natural resources, brand awareness, organizational structure, main staff, operational potential, etc. Analysis of internal environment helps in identifying strengths and weaknesses of an organization.

External Analysis
The essential purpose of the external analysis is to identify strategic opportunities and threats in the organizations operating environment that will effect how it pursues its mission. Three interrelated environments should be examined: 1. The industry environment 2. The business 3. The macro environment factors.

Industry Environment
An industry can be defined as a group of companies offering products or services that are close substitute of each other i.e. products or services that satisfy the same basic customer needs. One of the most important factors that determines firm performance is the structure of the industry the firm operates in. There are some industries that are inherently attractive, whereas others are relatively difficult.

Cont..
There are two theories of economics that represent the two extremes of industry structure. 1. Theory of monopoly 2. Theory of perfect competition In reality industries, fall somewhere in between these two extremes.

Cont..
Along with this the industry structure is determined by a set of factors. Michael E. Porters five forces Model is a tool for analyzing industry structure. Threat of new entrants Bargaining power of buyers Bargaining power of suppliers Threat of substitutes Intensity of rivarly among firms

1. 2. 3. 4. 5.

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Threat of Substitute Products

Threat of new entrants

New entrants are not currently competing in an industry but have the capability to do so if they choose. Established companies already operating in an industry often attempt to discourage potential competitors from entering the industry because the more companies that enter, the more difficult it becomes for established companies to protect their share of market and generate profits.

Cont..
The risk of entry by potential competitors is a function of the height of barriers to entry, that is, factors that make it costly for companies to enter an industry. High entry barriers may keep potential competitors out of an industry even when industry profits are high.

Threat of New Entrants

Economies of Scale

Barriers to Entry

Product Differentiation Capital Requirements

Customer Switching Costs

Access to Distribution Channels Learning curve Government Policy

Bargaining Power of Suppliers

Suppliers are likely to be powerful if:
Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality

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

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers products are differentiated

Suppliers products have high switching costs Supplier poses credible threat of forward integration

Bargaining Power of Buyers

Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to sellers sales

Buyers compete with the supplying industry by:

* Bargaining down prices * Forcing higher quality

Products are undifferentiated Buyers face few switching costs

Buyer presents a credible threat of backward integration Product unimportant to quality

Buyer has full information

Threat of substitutes
Products with similar function limit the prices firms can charge. Substitute products competitive strength high when the relative price of substitute products declines. Consumer switching costs decline.

Rivalry among competitors

Intensity increases as the number of competitors increases or they become equal in size. Demand for the industrys products declines or industry growth slows. Fixed costs or barriers to leaving the industry are high.

Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:
Jockeying for strategic position Using price competition

Staging advertising battles Increasing consumer warranties or service Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors

Usefulness of Industry Analysis

The basic purpose of industry is to assess the relative strengths and weaknesses of an organization relative to other players in the industry. Industry analysis helps firms in the following ways: 1. Industry attractiveness: it helps to find out the growth potential of the industry, the profitability of the industry, the relative abilities of players in that industry 2. Competitive position: where does the firm stand in comparison to others in a particular industry. By doing this the firm can have a realistic picture of its own strengths and weaknesses.

Macro Environmental Analysis

Political and legal forces: are the outcomes of changes in laws and regulations. Three major trends have a defining impact on the firms1. Deregulation 2. Globalization 3. Concern of natural environment

Economic environment
Economic growth leads to an expansion in customer expenditures, tends to produce a general competitive pressures within an industry. Growth rate of economy Rate of interest Inflation Currency exchange rate

1. 2. 3. 4.

Social and demographic environment

Demographic forces are the outcomes of changes in the characteristics of a population such as age, gender, origin, race, social class etc. Social forces refer to the way in which changing social modes and values affect the industry. Social changes create opportunities and threats. (like greater health consciousness)

Technological environment
Technology changes have been responsible for the development of new industries, influencing consumer behaviour as well as defining the way firms do business and relate to their customers, vendors and business partners.

Differential firm performance

It refers to the observation that firms which possess similar resources and operate with in the same industry experience different levels of profitability. Why?

Key Questions for Managers in Internal Analysis

How do we assemble bundles of Resources, Capabilities and Core Competencies to create VALUE for customers? And... Will environmental changes make our core competencies obsolete? Are substitutes available for our core competencies? Are our core competencies easily imitated?

The Internal environment Value creating activities

Value chain analysis, which was devised by Porter, is a technique which helps us assess an organizations resources and in doing so determine its strength and weaknesses. Value chain analysis looks at the activities that go to make up a product or service with a view to ascertaining how much value each activity adds. Value and margin is the difference between the total value received by the firm from the consumer for its product and the total cost of creating the product.

Cont..
If the company desires to increase value it adds for the consumers products, be they the end consumer or an intermediate such as a distributor, it needs to know where and how much value each activity adds and importantly how it might enhance this value added further by configuring parts or all of the value added process. However, it is recognized that organizations can also add value through cooperation with suppliers, customers, and distributors. This process is referred to as the value chain system.

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Firm Infrastructure
Support Activities

Human Resource Management

Technological Development

Procurement
Operations Outbound Logistics Marketing & Sales Inbound Logistics Service

Primary Activities

Cont..
Inbound logistics: these are the value chain activities that cover receiving, storing, and distributing inputs to the product. It includes material handling, warehousing, inventory control, vehicle scheduling and returns to supplier. Operations: these activities deal with transforming an organizations inputs into final products such as machining, packaging, assembly, testing, printing and facility operations. Outbound logistics: these activities are associated with collecting, storing and distributing the product or service to buyers. It includes warehousing, material handling, delivery, order processing and scheduling.

Cont..
Marketing and sales: this includes activities that make a product available for buyers to purchase and induces them to buy. It includes advertising, promotions, sales force, channel relations and pricing. Service: these activities enhance or maintain the value of products, such as installation, repair etc.

Discovering Core Competencies

Discovering Core Competencies

Competitive Advantage
Gained through Core Competencies

Strategic Competitiveness
Above-Average Returns

Core Competencies
Sources of Competitive Advantage

Capabilities
Teams of Resources

Criteria of Sustainable Advantages * * * * Valuable Rare Costly to Imitate Nonsubstitutable

Value Chain Analysis

*

Resources
* Tangible * Intangible

Resources
Tangible Resources
* * * * Financial Physical Human Resources Organizational

What a firm Has...

What a firm has to work with: its assets, including its people and the value of its brand name

Resources represent inputs into a firms production process...

such as capital equipment, skills of employees, brand names, finances and talented managers

Intangible Resources
* Technological * Innovation

* Reputation

Capabilities

What a firm Does...

Capabilities represent: the firms capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firms tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.

Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage.

Core Competencies

What a firm Does... that is Strategically Valuable

are the essence of what makes an organization unique in its ability to provide value to customers.

McKinsey & Co. recommends identifying three to four competencies to use in framing strategic actions.

Core Competencies
Core Competencies must be:
Valuable

What a firm Does... that is Strategically Valuable

Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment

Capabilities that are possessed by few, if any, current or potential competitors

Rare

Costly to Imitate
Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity

Capabilities that do not have strategic equivalents, such as firmspecific knowledge or trust-based relationships

Nonsubstitutable

Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers

Firm Infrastructure
Human Resource Management

Support Activities

Human Resource Management purchase a portion Firms often

Technological Development Procurement

Technological

Procurement
Operations Inbound Logistics

of their value-creating activities from Development specialty external suppliers who can perform these functions more efficiently

Outbound Logistics

Marketing & Sales

Service

Service

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Primary Activities

Discussion
1. 2. 3. 4. Are the following functional, business, or corporate strategic decisions for a large firm? Entering a new market in Greece Moving to an expensive office building close to where major customers are located Launching a major advertising campaign for a product Changing the supplier of an important component that has a major impact on the quality of the finished product