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DefinitionsStrategic management deals with long-term

planning and setting the main goals of business

Achieving these objects entails inevitably growth of the business

Growth can be internal/intensive or external/integrative

Financing growth might prove difficult and hamper flexibility over the long-run

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Strategy, mission, competitivenessOperational management concerns decisions

about day-to-day business activitiesStrategic management concerns decisions

about the long-term agenda, course and goals of business

The company’s general objectives can be often identified in the mission statement

The company’s vision is the idealistic perception of what the organization wants to be

Competitive advantage (CA) of the firm is based on internal and external factors that make competition with its rivals more effective

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Volvo as an exampleVision “to be valued as the world’s leading supplier of commercial

transport solutions”

Mission “By creating value for our customers, we create value for our

shareholders. We use our expertise to create transport-related products and services of superior quality, safety and environmental care for demanding customers in selected segments. We work with energy, passion and respect for the individual”

Strategy “is based on customers’ requirements and is focused on profitable growth, product renewal and internal efficiency. Customer satisfaction is a key factor as it lays a foundation for future sales and future profitability”

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External environmentAndrew Grove:

6th factor:Complementors

Michael Porter:6th factor:

Government

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The 5 forcesSuppliers

•Limited number & no alternatives •Cost for supply is high•Supplier is big & powerful, customers are fragmented

Buyers•Limited number and too powerful•Product is identical, buyers easily switch•The buying company can produce the product itself

Existing competitors

•many competitors of similar size•Low growth market•High exit costs•Competitors might merge

Potential entrants•Barriers to entry – brand loyalty and cost leadership of existing players

Substitutes•Cost and quality of substitute

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Internal environmentThe value chain

analysis identifies stages of business activity that create product value

Primary activities include physical formation of the product, distribution and sales

Support activities underpin the production process and add value indirectly 7

External (market) strategyPorter’s ‘generic’ strategies – firm will maintain CA, if it adopts one of the following tactics: Cost leadership – producing at the lowest cost will guarantee competitive price (no brand loyalty, D is elastic)Differentiation – product uniqueness creates customer loyalty, firm charges high prices Focus (niche) – products are specially designed for a small market segment. Could be either cost or differentiated focus

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Internal (resource) strategyCore competencies are the specific skills,

expertise and know-how of a firm, which are the source of its CA

In order to sustain them over the long-run, CC need to be:

valuable – should provide special benefit to the consumer rare – should not be possessed by competitors costly to imitate – difficult to copy non-substitutable – there is no alternative to the

product/services

Volvo CC – making safe and reliable cars

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Internal growth strategies Intensive growth requires internal expansion:horizontal expansion – extending market share through product modificationvertical integration – extending market share by expansion to more stages of productionoachieving economies of scaleoreducing transaction costs & uncertaintyoestablishing barriers to entryotapered vertical integration (using both own facilities and subcontractors)conglomerate – extending product range with new products to new markets

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Growth vector (Ansoff) matrix

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Growth-share (BCG)matrix

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External growth strategyIntegrative growth requires external expansion:Strategic alliance – horizontal or vertical cooperation between companies, which allows the participants to cut costs, maximize profits and improve their products:ojoint venture – two companies create and co-own legally a new entityoconsortium – created for specific (large) projects ofranchising & licensing – one company produces goods (with the trade mark of the other) and pays a fee osubcontracting – one company employs another to produce or supply productsonetworking – informal, non-biding partnership

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Airline Alliances

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External growth strategy (2)External expansion can be also attained through:Merger or acquisition (horizontal, vertical, conglomerate)

Why ?oGrowth is far more easily achievedoEconomies of scale ?oExpand market share (monopoly power?)oAccess to new funds, valuable assets, expertiseoIncreased equity pricesoDecreased market uncertainty o‘white knight’ and ‘asset stripping’

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Financing growthThere are 3 main sources of company finance:Retained earning – trade off b/n investment and dividend paymentBorrowing – short and medium-term finance might come from a bank, interest rate sensitiveStock market – listing, new share issuesForeign funding – the EU

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Recessionary growth?During recessions, demand and revenues sharply fall, companies need to cut costs or stimulate demand, in order to not go bankrupt. Following strategies could be applied:

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MeasureMeasure Saves Saves MoneMone

yy

Negative EffectNegative Effect

Cutting staff Increasing unemployment in recessions suppresses demand even further

Minimizing staff training

Productivity and quality might decrease (better re-adapt methods)

Cutting Advertising Company image might suffer (switch to other media channels)

Holding existing customers

Adapt product, add loyalty programs and promotions (could also attract new customers)

Diversifying Enter new markets, or launch new products to off-set losses (risky)

Sources:Lecture is based on:Business growth and strategy (Chapter 6) in Sloman, J. and Jones, E. (2011) Economics and the

Business Environment (3rd ed) UK: Pearson

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