What Factors Are Driving Industry Change?

“If you don’t have a strategy you will be . . . part of somebody else’s strategy.”

- Alvin Toffler

What Factors Are Driving Industry Change and What Impacts Will They Have?

• Industries change because forces are driving industry participants to alter their actions

• Driving forces are the major underlying causes of changing industry and competitive conditions

Analyzing Driving Forces

1. Identify forces likely to exert greatest influence over next 1 - 3 years

– Usually no more than 3 - 4 factors qualify as real drivers of change

2. Assess impact

– Are the driving forces causing demand for product to increase or decrease?

– Are the driving forces acting to make competition more or less intense?

– Will the driving forces lead to higher or lower industry profitability?

Strategic Groups within Industries

Strategic Groups are groups of companies that follow a business model similar to other companies within their strategic group – but are different from that of other companies in other strategic groups.

Implications of Strategic Groups – 1. The closest competitors are within the same Strategic Group

and may be viewed by customers as substitutes for each other.2. Each Strategic Group can have different competitive forces

and may face a different set of opportunities and threats. Mobility Barriers – factors within an industry that inhibit the

movement of companies between strategic groups• Include barriers to enter another group or exit existing group

The basic differences between business models in different strategic groups can be captured by a relatively small number of strategic factors.

Strategic Group Mapping

• Firms in same strategic group have two or more competitive characteristics in common

– Have comparable product line breadth

– Sell in same price/quality range

– Emphasize same distribution channels

– Use same product attributes to appealto similar types of buyers

– Use identical technological approaches

– Offer buyers similar services

– Cover same geographic areas

Procedure for Constructing a Strategic Group Map

STEP 1: Identify competitive characteristics that differentiate firms in an industry from one another

STEP 2: Plot firms on a two-variable map using pairs of these differentiating characteristics

STEP 3: Assign firms that fall in about the same strategy space to same strategic group

STEP 4: Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales

Analyzing Company’s Resources &

Competitive Position

Abell’s Framework for Defining the Business

Figure 1.5

Source: D. F. Abell, Defining the Business: The Starting Point of Strategic Planning

Types of ResourcesRelatively easy to identify, and include physical and financial assets used to create value for customers– Financial resources

• Firm’s cash accounts

• Firm’s capacity to raise equity

• Firm’s borrowing capacity

– Physical resources• Modern plant and facilities

• Favorable manufacturing locations

• State-of-the-art machinery and equipment

Tangible Resources

– Technological resources• Trade secrets

• Innovative production processes

• Patents, copyrights, trademarks

– Organizational resources• Effective strategic planning

processes

• Excellent evaluation and control systems

Types of ResourcesTangible

ResourcesRelatively easy to identify, and include physical and financial assets used to create value for customers

Types of ResourcesDifficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time– Human

• Experience and capabilities of employees

• Trust

• Managerial skills

• Firm-specific practices and procedures

Tangible Resources

Intangible Resources

Types of Resources

– Innovation and creativity• Technical and scientific skills

• Innovation capacities

– Reputation• Effective strategic planning processes

• Excellent evaluation and control systems

Tangible Resources

Intangible Resources

Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time

Types of ResourcesCompetencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end– Outstanding customer service

– Excellent product development capabilities

– Innovativeness of products and services

– Ability to hire, motivate, and retain human capital

Tangible Resources

Intangible Resources

Organizational Capabilities

How Resources and Capabilities Lead to Advantages

Firm Resources and Sustainable Competitive Advantages

Is the resource or capability…

Valuable

Rare

Difficult to imitate

Difficult to substitute

Implications

• Neutralize threats and exploit opportunities

• Not many firms possess

• Physically unique

• Path dependency

• Causal ambiguity

• Social complexity

• No equivalent strategic resources or capabilities

Analysis of the Company’s Present Strategies

• SWOT Analysis

• Value Chain Analysis

• Benchmarking

• Ethical Conduct

Critical Factors Considered

• (1) What factors influence the durability of competitive advantage?

• (2)Why do successful companies often lose their competitive advantage?

• (3) How can companies avoid competitive failure and sustain their competitive advantage over time?

SWOT Analysis

SWOT is an ellipsis for the internal Strengths and Weaknesses of a business and environmental Opportunities and Threats facing that business.

Pattern of SWOT Analysis• High opportunities and high strengths.

– Supports an aggressive strategy• High opportunities and low strengths.

– Turnaround oriented strategy• High threats and high strengths.

– Supports Diversification strategy • High threats and low strengths.

– Supports a Defensive strategy.

Objectives of SWOT Analysis

• To provide a framework to reflect the organizational capability to avail opportunities or to overcome threats presented by the environment.

• It presents the information about external and internal environment to structured form whereby key external opportunities

Meaning:

SWOT analysis is a systematic identification of factors and the strategy that reflects the best match between them. It is based on the logic that an effective strategy maximizes a business’s strengths and opportunities and minimizes its weaknesses and threats. This simple assumption if accurately applied has powerful implications for successfully choosing and designing an effective study.

Strengths A strength is a resource, skill or other advantage

relative to the competitors and the needs of the markets firm serves or anticipates serving.

A strength is a distinctive competence that gives firm a comparative advantage in the marketplace.

E.g.• - financial resources• - image• - market leadership

Weaknesses A weakness is a limitation or deficiency in

resources, skills, and capabilities that seriously impedes effective performance.

Eg: Facilities, financial resources, management capabilities, marketing skills, and brand image could be sources of weaknesses.

o Aids in narrowing the choice of alternatives and selecting a strategy.

o Distinct competence and critical weakness are identified in relation to key determinants of success for market segment.

OpportunitiesAn opportunity is a major favorable situation in

the firm’s environment.

E.g.     - identification of a previously unlooked

market segment     - changes in competitive or regulatory

circumstances     - technological changes

Threats A threat is a major unfavorable situation in the firm’s environment. It is a key obstacle to the firm’s current and/ or desired future position.

E.g.- entrance of a new competitor- slow market growth- increased bargaining power of key buyers and

suppliers

Understanding the key opportunities and threats facing a firm helps manager identify realistic options from which to choose an appropriate strategy.

• Strength, weakness, opportunity and threat – analysis should be undertaken in an integrated way by combining organizational capability profile (OCP) and

• Environmental Threat and Opportunity Profile (ETOP).

Plotting a Route to the Top• Do a SWOT analysis for yourself• Outline a strategy for yourself

– Unique

• Making yourself known is absolutely essential– Next to talent, the second most important

factor in career or entrepreneurial success is taking the time and effort to develop visibility

• Get your name in print• Give speeches• Continually add names to your Rolodex

• Volunteer for industry association and professional organization jobs

• Take time off for a stint in government• Make your superiors look good

Internal Analysis

• Identifying the strengths and weaknesses of the company

• Managers must understand– The role of resources, capabilities, and

distinctive competencies in the process by which companies create value and profit

– The importance of superior efficiency, innovation, quality, and responsiveness to customers

– The sources of their company’s competitive advantage (strengths and weaknesses)

Internal Analysis includes an assessment of:• Quantity and quality of a company’s resources and

capabilities• Ways of building unique skills and company-specific or

distinctive competencies

Internal AnalysisThe purpose of internal analysis is to pinpoint the

strengths and weaknesses of the organization. Strengths lead to superior performance. Weaknesses lead to inferior performance.

Building and sustaining a competitive advantage requires a company to achieve superior:

• Efficiency• Quality

• Innovations• Responsiveness to customers

Internal Analysis: Strengths and Weaknesses

Internal analysis - along with the external analysis of the company’s environment - gives managers the information to choose the strategies and business model to attain a sustained competitive advantage.

StrengthsOf the enterprise are assets that

boost profitability

Weaknesses Of the enterprise are liabilities that

lead to lower profitability

Internal Analysis: A Three-Step Process

1. Understand the process by which companies create value for customers and profit for themselves.

Resources Capabilities Distinctive competencies

2. Understand the importance of superiority in creating value and generating high profitability.

Efficiency Quality

3. Analyze the sources of the company’s competitive advantage.

Strengths – that are driving profitability Weaknesses – opportunities for improvement

Innovation Responsiveness to Customers

The Role of Resources

• Resources– Capital or financial, physical, social or human,

technological, and organizational factor endowments• Tangible and intangible

• A firm-specific and difficult to imitate resource is likely to lead to distinctive competency

• A valuable resource that creates strong demand for a firm’s products may lead to distinctive competency

The Role of Capabilities

• Capabilities– A company’s skills at coordinating and using

its resources

• Capabilities are the product of organizational structure, processes, and control systems

Strategic Resources and Capabilities

• Tangible– Land

– Buildings

– Plant

– Equipment

• Intangible– Brand names

– Reputation

– Patents

– Technological or marketing know-how

Distinctive Competencies

• Skills in effectively coordinating and managing resources for productive use.– Unique resources and capabilities, or– Common resources and

unique capabilities.

Distinctive Competences and Competitive Advantage

• Distinctive competencies– Firm-specific strengths that allow a company

to gain competitive advantage by differentiating its products and/or achieving lower costs than its rivals

– Arise from resources and capabilities

A Critical Distinction

• If a firm has firm-specific and valuable resources it must also have the capability to use them effectively to create distinctive competency

• A firm can create distinctive competency without firm-specific and valuable resources if it has unique capabilities. (RIL – to invest 3 bilion$ in fertilizer Industry.)

Competitive Advantage, Value Creation, and Profitability

• Profitability factors– Amount of value customers place on the

company’s products– Price charged– Costs of creating the value

FIGURE 4.8

Strategy and Competitive Advantage

• The relationship between strategies and resources and capabilities:

The Durability of Competitive Advantage

• Barriers to imitation– Speed of imitation by competitors in reducing

advantage– Imitation by acquiring similar resources– Imitation of capabilities (more difficult)

• Limits on competitors– Prior strategic commitments– Absorptive capacity for change

• Industry dynamism– The rapid innovation

shortens product life cycles.

Competitive Advantage

• Competitive Advantage– A firm’s profitability is greater than the average

profitability for all firms in its industry.

• Sustained Competitive Advantage– A firm maintains above average and superior

profitability and profit growth for a number of years.

The Primary Objective of Strategy

is to achieve a Sustained Competitive Advantage

which in turn results in Superior Profit and Profit Growth.

Competitive Advantage: Value Creation, Low Cost, and

Differentiation

• Competitive advantage is a firm’s ability to outperform its competitors (earn higher profits).

• The source of competitive advantage is value creation for customers.

• Sustained competitive advantage comes from maintaining higher profits than competitors over long periods of time.

Profitability in the Computer Industry, 1998-2003

Dell has achieved a sustained competitive advantage over its rivals.

Data Source: Value Line Investment Survey

Distinctive Competencies and Role of Resources and Capabilities

Resources• Tangible (physical) and intangible (non-physical)• Allow a company to create value for its customers• Must have skills to take advantage of the resources• Firm-specific and difficult-to-imitate resources as well as valuable resources that create strong demand for a company’s products lead to distinctive competencies

Capabilities • Coordinating resources & putting to productive use• Skills reside in the organization’s rules, routines and procedures• Product of its organization, processes & controls• Firm-specific capabilities to manage its resources lead to distinctive competencies

Competitive Advantage, Value Creation, and Profitability

1. VALUE or UTILITY the customer gets from owning the product

2. PRICE that a company charges for its products

3. COSTS of creating those products

Consumer surplus is the “excess” utility a consumer captures beyond the price paid.

Basic Principle: the more utility that consumers get from a company’s products or services, the

more pricing options the company has.

How profitable a company becomes depends on three basic factors:

Profitability in the U.S. Retailing Industry, 1996-2001

Strategy, Resources, Capabilities, and Competencies

Value Creation per Unit

Value Creation and Pricing Options

Comparing Toyota and General Motors

Differentiation and Cost Structure: Roots of Competitive

Advantage

The Generic Building Blocks of Competitive Advantage

Efficiency

• The quantity of inputs it takes to produce a given output

• Productivity leads to greater efficiency and lower costs– Employee productivity– Capital productivity

FIGURE 4.5

The Impact of Efficiency, Quality, Innovation, and Customer Responsiveness on Unit Costs and Prices

Quality

• Superior quality = customer perception of greater value in a specific product’s attributes– Form, features, performance, durability,

reliability, style, design

• Quality products = goods and services that are reliable and that are differentiated by attributes that customers perceive to have higher value

Quality (cont’d)

• The impact of quality on competitive advantage– High-quality products increase the value of

(differentiate) the products in customers’ eyes– Greater efficiency and lower unit costs are

associated with reliable products

FIGURE 4.4

The Impact of Quality on Profits

A Quality Map for Automobiles

Innovation

• The act of creating new products or processes– Product innovation

• Creates products that customers perceive as more valuable, increasing the company’s pricing options

– Process innovation• Creates value by lowering production costs

• Perhaps the most important building block of competitive advantage

Responsiveness to Customers

• Doing a better job than competitors of identifying and satisfying customers’ needs– Superior quality and innovation are integral to

superior responsiveness to customers– Customizing goods and services to the unique

demands of individual customers or customer groups

Responsiveness to Customers (cont’d)

• Sources of enhanced customer responsiveness– Customer response time, design, service,

after-sales service and support

• Differentiates a company/its products; leads to brand loyalty and premium pricing

FIGURE 4.7

Distinctive Competencies, Resources, and Capabilities

• The roots of competitive advantage:

The Durability of Competitive Advantage

1. Barriers to ImitationMaking it difficult to copy a company’s distinctive competencies Imitating Resources Imitating Capabilities

2.Capability of Competitors Strategic commitment

Commitment to a particular way of doing business Absorptive capacity

Ability to identify, value, assimilate, and use knowledge

3.Industry DynamismAbility of an industry to change rapidly

The DURABILITY of a company’s competitive advantage over its competitors depends on:

Competitors are also seeking to develop distinctive competencies that will give them a competitive edge.

Analyzing Competitive Advantage and Profitability

• Benchmarking company performance against that of competitors and the company’s own historic performance

• Return on invested capital

capital InvestedprofitNet ROIC

• Net profit = Total revenues – Total costs

Analyzing Competitive Advantage and Profitability

Competitive Advantage• When a companies profitability is greater than the average of all

other companies in the same industry that compete for the same customers

Benchmarking• Comparing company performance against that of competitors and

the company’s historic performance

Measures of Profitability

• Return On Invested Capital (ROIC)• Net profit Net income after tax

Capital invested Equity + Debt to creditors

• Net Profit Net Profit = Total revenues – Total costs

= ROIC =

Definitions of Basic Accounting Terms

Drivers of Profitability (ROIC)

Ways to Increase ROIC

• Increase the company’s return on sales– Reduce cost of goods sold– Reduce spending on sales force, marketing,

general, and administrative expenses– Reduce R&D spending– Increase sales revenue more than costs

• Increase sales revenues from invested capital– Reduce the amount of working capital– Reduce amount of fixed capital

The Durability of Competitive Advantage

• Barriers to Imitation– Imitating Resources– Imitating Capabilities

• Capability of Competitors– Strategic commitment– Absorptive capacity

• Industry Dynamism

Why Do Companies Fail?• What went wrong?

– Inertia– Prior strategic

commitments– The Icarus paradox

• Avoiding failure and sustaining competitive advantage:– Focus on the building

blocks of competitive advantage.

– Institute continuous improvement and learning.

– Track best industrial practice and use benchmarking.

– Overcome inertia.

Avoiding Failure and Sustaining Competitive Advantage

• Focus on the building blocks of competitive advantage

• Institute continuous improvement in learning

• Track best industrial practice in use benchmarking

• Overcome inertia

• Luck

FIGURE 4.1

Return on Capital Employed for Selected U.S. Department Stores,

1989-1998

Source: Data from Value Line Investment Survey

The Value Chain

• A company is a chain of activities for transforming inputs into outputs that customers value

• The transformation process is composed of primary and support activities that add value to the product

Value Chain Analysis• The value chain, also known as value

chain analysis, is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.

• A value chain is a chain of activities.

• The value chain categorizes the generic value-adding activities of an organization.

• The "primary activities" include: inbound logistics, operations (production), outbound logistics, marketing and sales, and services (maintenance).

• The "support activities" include: administrative infrastructure management, human resource management, R&D, and procurement.

• The concept has been extended beyond individual organizations. It can apply to whole supply chains and distribution networks.

• Porter terms this larger interconnected system of value chains the "value system.“

• Michel Porter’s - A useful tool for analyzing a firm’s strengths and weaknesses and understanding how they might translate into competitive advantage or disadvantage.

• The value chain is a business system concept,

which was originally developed by McKinsey and Company and further developed and clarified by Porter.

• This concept captures the idea that a firm is a series of functions (e.g. R&D, manufacturing, marketing, distribution etc.) and that each of these can be analyzed to determine ones own and the competitors’ strengths and weaknesses

Main aspects of Value Chain Analysis

• Value chain analysis is a powerful tool for managers to identify the key activities within the firm which form the value chain for that organization, and have the potential of a sustainable competitive advantage for a company.

• Therein, competitive advantage of an organization lies in its ability to perform crucial activities along the value chain better than its competitors.

General administration

Human resource management

Technology development

Procurement

Inbound logistics

OperationsOutbound logistics

Marketing and sales

Service

In order to conduct the value chain analysis, the company is split into

primary and support activities

FIGURE 4.6

The Value Chain

The Value Chain: Primary and Support Activities

Primary value chain activities Primary ActivityDescription• Inbound logistics: All those activities concerned

with receiving and storing externally sourced materials

• Operations: The manufacture of products and services - the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products)

• Outbound logistics: All those activities associated with getting finished goods and services to buyers

• Marketing and sales Essentially: an information activity - informing buyers and consumers about products and services (benefits, use, price etc.)

• Service: All those activities associated with maintaining product performance after the product has been sold

Support activities include

Secondary ActivityDescription• Procurement This concerns how resources are

acquired for a business (e.g. sourcing and negotiating with materials suppliers)

• Human Resource Management: Those activities concerned with recruiting, developing, motivating and rewarding the workforce of a business

• Technology Development: Activities concerned with managing information processing and the development and protection of "knowledge" in a business

• Infrastructure Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management

Linkages within the Value Chain

• Although value activities are the building blocks of competitive advantage, the value chain is not a collection of independent activities but a system of interdependent activities.

• Value activities are related by linkages within the value chain.

Linkages within the Value Chain

• Linkages are relationships between the way one value activity is performed and the cost of performance of another.

• Linkages often reflect tradeoffs among activities to achieve the same overall result.

• For example a more costly product design, more stringent materials specifications, or greater in-process inspection may reduce service costs.

Linkages within the Value Chain

• Linkages may also reflect the need to coordinate activities. On-time delivery,

• for example, may require coordination of activities in operations and service.

• The ability to coordinate linkages often reduces costs or enhances differentiation.

• Better coordination, for example can reduce the need for inventory throughout the firm.

Steps in Value Chain AnalysisValue chain analysis can be broken down into a three

sequential steps:• Break down a market/organization: into its key

activities under each of the major headings in the model.

• Assess the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage.

• Determine strategies built around focusing on activities where competitive advantage can be sustained.

MERITS

• Value Chain Analysis provides a generic framework to analyze both the behavior of costs as well as the existing and potential sources of differentiation.

• Porter emphasized the importance of regrouping functions into activities to produce, market, deliver and support products, to think about relationships between activities and to link the value chain to the understanding of an organization's competitive position.

• The value chain made clear that an organization is multifaceted and that its underlying activities need to be analyzed to understand its overall competitive position.

• The Value Chain model was intended as a quantitative analysis. It can also be used as a quick scan to describe the strengths and weaknesses of an organization in qualitative terms.

• With the Value Chain Analysis, Porter tried to overcome the limitations of portfolio planning in multidivisional organizations.

• The concept of Strategic Business Units stated that businesses within a conglomerate should act independently while headquarters should be responsible only for budgetary decisions to be based on a business unit's position in the overall portfolio

• Porter used his Value Chain Analysis to identify synergies or shared activities between Strategic Business Units and to provide a tool to focus on the whole rather than on the parts.

DEMERITS

• The quantitative analysis is time consuming since it often requires recalibrating the accounting system to allocate costs to individual activities.

• . Porter provided qualitative guidance for a quantitative exercise. His analysis began with identifying the relevant activities that lead to competitive differences and are significant enough to influence the organization’s overall cost base.

• The Value Chain Analysis should be accompanied with a customer segmentation analysis to mix the internal and external view.

• A feature or product provides the firm with a differentiating competitive advantage only if customers are willing to pay for it.

• Customer value chains need to be analyzed to determine where value is created.

• The Value Chain is used to analyze a firm's position in relation to its direct competitors with the assumption that rivalry drives profitability. This excludes other assumptions such as customer bonding in Alexander Hax's delta model.

• The Value Chain Analysis was developed to analyze physical assets in product environments. Other authors amended the model to accommodate intangible assets and service organizations

Limitations of Value Chain Analysis

• One of the limitations of the value chain model is that it describes an industrial organization which essentially buys raw materials and transforms these into physical products.

• The limitations of the model include the fact that ‘value’ for the final customer is the value only in its theoretical context and not practical terms.

• The real value of the product is assessed when the product reaches the final customer, and any assessment of that value before that moment is only something that is true in theory.

• Despite this limitation, analysts can effectively use the value chain model to determine the value to the final customers in a theoretical way.

According to Porter, competitive advantage,

and thus higher profits will result either from:

• Differentiation of products and selling them at a premium price, OR

• Producing products at a lower price than competitors

• The two basic types of competitive advantage combined with the scope of activities for which the firm seeks to achieve these advantages results in three different types of strategy - cost leadership, differentiation and focus.

Benchmarking Costs ofKey Value Chain Activities

• Focuses on cross-company comparisons of how certain activities are performed and costs associated with these activities

Purchase of materialsPayment of suppliersManagement of inventoriesGetting new products to marketPerformance of quality controlFilling and shipping of customer orders Training of employeesProcessing of payrolls

• Identify the competitors

• Identify what they want

• Identify their strategy

• Identify their strengths & weaknesses/relative capabilities

• Predict what they will do.

Five step approach to competitor analysis

Developing Data to Measure a Company’s Cost Competitiveness

• After identifying key value chain activities, the next step involves breaking down departmental cost accounting data into costs of performing specific activities

• Appropriate degree of disaggregation depends on– Economics of activities

– Value of comparing narrowly defined versus broadly defined activities

• Guideline – Develop separate cost estimates for activities– Having different economics

– Representing a significant or growing proportion of costs

Activity-Based Costing: A Key Tool in Analyzing Costs

• Determining whether a company’s costs are in line with those of rivals requires

Measuring how a company’s costs compare with those of rivals activity-by-activity

• Requires having accounting data to measure costof each value chain activity

• Activity-based costing entailsDefining expense categories according to specific activities

performed andAssigning costs to the activity responsible for creating the

cost

The strategic management process attempts to organize quantitative and qualitative information under conditions of uncertainty.

Integrating Intuition and Analysis

Intuition is based on:– Past experiences– Judgment– Feelings

Integrating Intuition and Analysis

Intuition is Useful for decision making– Conditions of great uncertainty– Conditions with little precedent

Analytical Thinking

Integrating Intuition & Analysis

Intuitive Thinking

Main Components of the Strategy- Making Process

Figure 1.4

Peter Drucker: -- think through the overall mission of a business. Ask the key question: “What is our Business?”

Prime Task of Strategic Management

Vision Statement –What do we want to become?

Mission Statement –What is our business?

The Mission

• What is it that the company does?

• What is the companies business?– Who is being satisfied (what customer groups)?– What is being satisfied (what customer needs)?– How customer needs are being satisfied (by what

skills, knowledge, or distinctive competencies)?

The mission is a statement of a company’s raison d’etre, its reason for existence today.

A company’s mission is best approached from a customer-oriented business definition.

The Mission Customer-Oriented Examples

The mission of Kodak is to provide “customers with the solutions they need to capture, store, process, output, and communicate images – anywhere, anytime.”

Ford Motor Company describes itself as a company that is “passionately committed to providing personal mobility for people around the world….We anticipate consumer need and deliver outstanding produces and services that improve people’s lives.”

The vision of Ford is “to become the world’s leading consumer company for automotive products and services.”

The VisionWhat would the company like to achieve?

A good vision is meant to stretch a company by articulating an ambitious but attainable future state.

Nokia is the world’s largest manufacturer of mobile phones and operates with a simple but powerful vision: “If it can go mobile, it will!”

“The last thing IBM needs right now is a vision.” (July 1993)

Vision

What IBM needs most right now is a vision.” (March 1996)

-- Louis V. Gerstner, Jr., CEO, IBM Corporation

Vision

Agreement on the basic vision for which the firm strives to achieve in the long run is critically important to the firm’s success.

“What do we want to become?”

ComprehensiveMission Statement

Vision

Clear Business Vision

Shared Vision --• Creates commonality of interests• Reduce daily monotony• Provides opportunity & challenge

Vision & Mission

To make available, reliable and quality power in increasingly large quantities

Vision Statement Examples

-- NTPC

A world class innovative, competitive and profitable engineering enterprise providing total business solutions

Vision Statement Examples

-- BHEL

To be the company of first choice in oral and personal hygiene by continously caring for consumers & partners

Vision Statement Examples

-- Colgate - Palmolive

“What is our business?”

Mission Statement

Mission Statements

• Enduring statement of purpose

• Distinguishes one firm from another

• Declares the firm’s reason for being

“What is our business?”

Essential for effectively establishing objectives and formulating strategies.

Mission Statements

“What is our business?”

Vision & Mission

Profit & vision are necessary to effectively motivate a workforce

Vision & Mission

Shared vision creates a community of interests

The Bellevue Hospital, with respect, compassion, integrity, and courage, honors the individuality and confidentiality of our patients, employees, and community, and is progressive in anticipating and providing future health care services.

Mission Statement Examples

-- The Bellevue Hospital

John Deere has grown and prospered through a long-standing partnership with the world’s most productive farmers. Today, John Deere is a global company with several equipment operations and complementary service businesses. These businesses are closely interrelated, providing the company with significant growth opportunities and other synergistic benefits.

Mission Statement Examples

-- John Deere, Inc.

To achieve and maintain a leading position as suppliers of quality equipment, systems & service to serve the national and international market in the field of energy. The areas of interest would be the conversion, transmission, utilisation and conservation of energy for applications in the power, industrial and transportation fields, to strive for technological excellence and market leadership in these areas.

Mission Statement Examples

-- BHEL

To attain leadership position in the confectionary market and achieve a strong national presence in the food drinks sector

Mission Statement Examples

-- Cadbury India

• 2x average return on shareholder’s equity• Positive relationship to company performance• 30% high return on certain financial measures

Vision & Mission

Research results are mixed, however, firms with formal mission statements --

Mission Elements

CustomersMarkets

Employees

PublicImage

Self-Concept Philosophy

SurvivalGrowthProfit

ProductsServices

Technology

PepsiCo MissionPepsiCo’s mission is to increase the value of our

shareholders’ investment. We do this through sales

growth, cost controls, and wise investment resources.

We believe our commercial success depends upon

offering quality and value to our consumers and

customers; providing products that are safe, wholesome,

economically efficient and environmentally sound; and

providing a fair return to our investors while adhering to

the highest standards of integrity.

Ben & Jerry’s Mission

Ben & Jerry’s mission is to make, distribute and sell the finest quality all-natural ice cream and related products in a wide variety of innovative flavors made from Vermont dairy products. To operate the Company on a sound financial basis of profitable growth, increasing value for our shareholders, and creating career opportunities and financial rewards for our employees. To operate the Company in a way that actively recognizes the central role that business plays in the structure of society by initiating innovative ways to improve the quality of life of a broad community—local, national and international.

Mission Statement Evaluation Matrix

COMPONENTS          

Organization CustomersProducts Services Markets

Concern for

Survival, Growth,

Profitability Technology

           

PepsiCo Yes No No Yes No

Ben & Jerry's No Yes Yes Yes No

           

Mission Statement Evaluation Matrix

COMPONENTS          

Organization PhilosophySelf-

ConceptConcern for Public Image

Concern for Employees

         

PepsiCo Yes No No No

Ben & Jerry's No Yes Yes Yes

         

Planned, Deliberate, Emergent and Realized Strategies

Source: Adapted from H. Mintzberg and A. McGugh, Administrative Science

Quarterly, Vol. 30. No. 2, June 1985.

Figure 1.6

Intended and Emergent Strategies

Successful products – 3M/ Honda

• Scotchguard from fluorocarbons (a/c equipment)

• Paste-it (weak adhesive)

• Introduction of low powered bikes by Honda in USA

Loss of opportunity

• Western Union (Telegraph Company) turning down the offer to purchase the right to invention (telephone) made by Graham Bell

Intended and Emergent Strategies

• Intended or Planned Strategies– Strategies an organization plans to put into action– Typically the result of a formal planning process– Unrealized strategies are the result of unprecedented changes

and unplanned events after the formal planning is completed

• Emergent Strategies– Unplanned responses to unforeseen circumstances– Serendipitous discoveries and events may emerge that can

open up new unplanned opportunities– Must assess whether the emergent strategy fits the company’s

needs and capabilities

• Realized Strategies– The product of whatever intended strategies are actually put

into action and of any emergent strategies that evolve

Strategic Planning in Practice

• Scenario Planning– Recognizes that the future is inherently unpredictable– Develops strategies for possible future scenarios

• Decentralized Planning– Involves the functional managers– Avoids the ivory tower approach– Perceives procedural justice in the decision making

• Strategic Intent– Avoids the strategic fit model, which focuses too much on

the current state– Sets ambitious vision and goals that stretch a company and

then finds ways to build to attain those goals

Recent studies suggest that formal planning does have a positive impact on company performance – and should

include the current and future competitive environments.

Strategic Decision Making In spite of systematic planning, companies may adopt poor

strategies if groupthink or individual cognitive biases are allowed to intrude into the decision-making process:

• Cognitive biases: Rules of thumb or heuristics resulting in systematic errors– Prior hypothesis bias

– Escalating commitment

– Reasoning by analogy

– Representativeness

– Illusion of control

• Groupthink: Decisionmakers embark on a course of action without questioning the underlying assumptions

– Group coalesces around a person or policy– Decisions based on an emotional rather than an objective assessment

of the correct course of action

Processes for Improving Decision Making

Reveals problems withdefinitions, assumptions, & recommended courses of action

To bring out all the reasons that might make the proposal unacceptable

Figure 1.7

Karan Thapar

Strategic Leadership

Vision, eloquence, and consistency (Dhirubhai-Reliance)

Commitment (Infy – Narayanamurthy)

Being well informed (Tata Steel – Rusi Modi)

Willingness to delegate and empower The astute use of power (build consensus)

Emotional intelligence– Self-awareness– Self-regulation– Motivation– Empathy– Social skills

Good leaders of the strategy-making process have a number of key attributes:

Examples: Strategies Basedon Distinctive Capabilities

• Sophisticated distribution systems – Wal-Mart

• Product innovation capabilities – 3M Corporation

• Complex technological process – Michelin

• Defect-free manufacturing – Toyota and Honda

• Specialized marketing and merchandising know-how – Coca-Cola

• Global sales and distribution capability – Black & Decker

• Superior e-commerce capabilities – Dell Computer

• Personalized customer service – Ritz Carlton hotels

Internal Factor evaluation (IFE)

IFE– Gateway Computers (2003)

Key Internal Factors Weight RatingWtd

Score

Strengths1. Several new senior executive with world-class skills and leadership experience

0.05 4 0.40

2. Continuous decline in operating costs and cost of goods sold

0.05 3 0.15

3. Well-known brand name 0.05 3 0.15

4. Consumer Reports (Sept 2002) recommended Gateway 500X as #1

0.10 4 0.40

5. As a direct seller, Gateway holds high brand recognition

0.05 3 0.15

IFE– Gateway Computers (2003)

Key Internal Factors Weight RatingWtd

Score

Strengths (cont’d)6. Gateway is diversifying into non-PC products

0.10 3 0.30

7. Good relationship with its suppliers. 0.05 4 0.20

8. Economies of scale, the 6th largest PC maker I the world

0.05 4 0.20

9. Gateway retails stores excellent 0.05 3 0.15

IFE– Gateway Computers (2003)

Key Internal Factors Weight RatingWtd

Score

Weaknesses1. High operating expense (22% of revenue vs. 10% for Dell)

0.05 3 0.15

2. Almost no budget for R&D vs. Dell’s 18% of revenue

0.10 1 0.05

3. Low return on assets ratio 0.025 1 0.10

4. No niche market 0.025 2 0.05

IFE– Gateway Computers (2003)

Key Internal Factors Weight RatingWtd

Score

Weaknesses (cont’d)5. Shortage of cash due to successive losses

0.10 2 0.20

6. Limited number Gateway stores 0.05 2 0.10

7. Weak performance in overseas market 0.10 2 0.20

TOTAL 1.00 2.85

““The essence of strategy lies in The essence of strategy lies in creating tomorrow’s competitive creating tomorrow’s competitive advantage faster than advantage faster than competitors mimic the ones you competitors mimic the ones you possess today.”possess today.”

- - Gary Hamel &Gary Hamel & C. K. PrahaladC. K. Prahalad