Strategic Management

Module 1 – Meaning, Importance, Characteristics

Contents

What Do We Mean By Strategy? Strategy and the Quest for Competitive Advantage

Why a Company’s Strategy Evolves Over Time

A Company’s Strategy is Partly Proactive and Partly Reactive

Strategy and Ethics: Passing the Test of Moral Scrutiny

The Relationship Between a Company’s Strategy and Its Business Model

What Makes a Strategy a Winner?

Why Are Crafting and Executing Strategy Important?

Thinking Strategically:The Three Big Strategic Questions

1. What’s the company’s present situation?

2. Where does the company need to go from here?

Businesses and markets to venture into

Consumer requirements and groups to serve

Which direction to head into?

3. How should it get there? A company’s answer to “how will we get there?”

is its strategy

E.g. Infosys’s 3.0 strategy

What Do We Mean By ‘Strategy’? Consists of competitive moves and business

approaches used by management to run the company

Management’s “action plan” to: Grow the business

Attract and delight clients

Compete successfully

Conduct operations well

Achieve target levels oforganizational performance

The ‘Hows’ That Define a Firm's Strategy

How to grow the business - Organic/Inorganic How to delight customers – Superior

products/services

How to outcompete rivals – Innovative practices

How to manage each functionalportion of the business (R&D, Production, Marketing, HR, Finance etc.) – Robust policies and procedures

How to respond to changing market conditions – Agile Sales and Operations

How to achieve targeted levels of performance – Absolute focus and clarity

Strategy

is HOW

to . . .

Choosing the ‘Hows’ of Strategy Strategic choices about “how” are based on:

Trial-and-error organizational learning about what has worked and what has not worked

Management’s appetite for taking risks Managerial analysis and strategic thinking about how best to

proceed, given market conditions and the company’s circumstances

e.g. Tata Motors takeover of Jaguar-Land Rover

In choosing a strategy, management is in effect saying:“Among all the many different business approaches and ways of competing we could have chosen, we have decided to employ this particular combination of competitive and operating approaches in moving the company in the intended direction, strengthening its market position, competitiveness and boosting performance.”

Key Elements of a Successful Strategy Developing a successful strategy depends on

making competitive moves aimed at: Appealing to buyers in ways to set the enterprise apart

from rivals Carving out its own market position

e.g. Nike

Involves developing a distinctive inspirationalelement to: Attract customers Produce a competitive edge

e.g. Apple

Copying competitive moves of other successful companies rarely works!

Strategy and the Quest for Competitive Advantage

The heart and soul of any strategy are the actions and moves in the marketplace that a company makes to strengthen its competitive position and gain a competitive advantage over rivals

A creative and distinctive strategy that sets a company apart from rivals and yields a competitive advantage is a company’s most reliable approach to increase profitability:

Competing with a competitive dis-advantage almost always results in below-average profitability

Competing with a competitive advantage is more profitable than competing with no advantage

A Powerful Strategy Leads to Sustainable Competitive Advantage A company achieves sustainable competitive

advantage when more number or buyers prefer its products/services over those of rivals and when the basis for this preference can be maintained over time

Its nice when a strategy produces a temporary competitive edge but a durable edge over rivals greatly enhances a company’s prospects for winning in the marketplace and realizing higher profits in the longer term

What separates a powerful strategy from an ordinary

strategy is management’s ability to forge a series of

moves, both in the marketplace and internally that

produces sustainable competitive advantage!

e.g. Zara apparels

Four “Best” Strategic Approaches toBuilding Sustainable Competitive Advantage

Strive to be the industry’s low-cost provider (a cost-based competitive advantage):

Big Bazaar – Low cost household products Indigo Airlines – No frills, low cost airline

Outcompete rivals on a key differentiating feature (a “superior product” type of competitive advantage linked to higher quality, better performance, wider selection, value-added services or some other attribute):

Harley-Davidson – King-of-the-road styling Rolex – Top-of-the-line prestige BMW – Engineering design and performance Amazon.com – Wide selection and convenience

Four “Best” Strategic Approaches toBuilding Sustainable Competitive Advantage

Focus on a narrow market niche (winning a competitive edge by doing a better job than rivals of serving the needs and preferences of buyers comprising the niche):

eBay – Online auctions Kaspersky – Virus protection products Starbucks – Premium coffees Discovery Channel – Science and Technology programs

Develop expertise, resource strengths and capabilities not easily imitated by rivals (a capabilities-based competitive advantage):

FedEx – Next-day delivery of small packages Disneyland – Theme parks and family entertainment Toyota – Sophisticated manufacturing system

Example: Micromax mobiles

1. 12th largest mobile handset manufacturer globally

2. Revenues of Rs.3100 crore, 150% growth over previous year

3. Product portfolio of over 120 models4. Already present in 14 countries globally5. Aiming to become a global $1billion

company in the next few years6. Innovative marketing and promotion

strategies7. Positioned as one of ‘leading Indian

brands’8. Has brought in senior executives from

Airtel, HTC, Sony etc.9. Pricing of mobiles from Rs.1000 to

Rs.18000

Your Opinion

From your perspective, does Micromax’s strategy seem to be well- matched to industry and competitive conditions?

Does the strategy seem to be connected to a cost advantage, differentiating features, serving the unique needs of a niche market or developing resource strengths and competitive capabilities rivals can’t imitate or overcome (or a mixture of these)?

What is special regarding Micromax’s strategy that can lead to sustainable competitive advantage?

Test Your Knowledge

A company’s strategy and its quest for competitive advantage are closely related because

A. a company’s strategy determines whether it will have lower or higher costs than rivals and thus be at a competitive advantage or disadvantage.

B. competitive advantage is essential to having a profitable business model.

C. choosing a competitive advantage to pursue also helps a company choose which business model is most appropriate.

D. competitive advantage enables a company to achieve its strategic objectives.

E. a strategy that leads to sustainable competitive advantage is a company’s most reliable means of achieving higher profitability and financial performance.

Why Do Strategies Evolve?

A company’s strategy is a work in progress Changes may be necessary to react to:

Shifting market conditions - Recession Technological breakthroughs Fresh moves of competitors Evolving customer preferences Emerging market opportunities – BRICS countries New ideas to improve strategy Crisis situations – Falling market share

A Company’s Strategy is Partly Proactive and Partly Reactive

A Firm’s Ethical Responsibilities to its Stakeholders

Owners/Shareholders – Rightfully expect some form of return on their investment

Owners/Shareholders – Rightfully expect some form of return on their investment

Employees - Rightfully expect to be treated with dignity and respect for devoting their energies to the enterprise

Employees - Rightfully expect to be treated with dignity and respect for devoting their energies to the enterprise

Customers - Rightfully expect a seller to provide them with a reliable, safe product or service

Customers - Rightfully expect a seller to provide them with a reliable, safe product or service

Suppliers - Rightfully expect to have an equitable relationship with firms they supply and be treated fairly

Suppliers - Rightfully expect to have an equitable relationship with firms they supply and be treated fairly

Community - Rightfully expect businesses to be good citizens in their community

Community - Rightfully expect businesses to be good citizens in their community

What is a Business Model?

A business model addresses the question “How do we make money in this business?”

Do the revenue-cost-profit economics of the strategy make good business sense? Look at revenue streams the strategy is expected to

produce Look at related costs and potential profit margins Are resulting earnings and ROI substantial and the

company has a practical solution for making money? If yes, then the company has a good business model

Relationship between Strategy and Business Model

Strategy . . .

Deals with a company’s competitive initiatives and overall business approaches

Business Model . . .

Relates to whether revenues and costs flowing from the strategy demonstrate a business which is profitable and viable

Strate

gy

Business

Model

Microsoft’s Business Model

Employ a cadre of highly skilled programmers to develop proprietary code; keep source code hidden from usersEmploy a cadre of highly skilled programmers to develop proprietary code; keep source code hidden from users

Sell resulting OS and software packages to PC makers and users at relatively attractive prices to achieve a 90% or more market share

Sell resulting OS and software packages to PC makers and users at relatively attractive prices to achieve a 90% or more market share

Most costs in developing software are fixed; variable costs are small; once break-even volume is reached, revenues from additional sales are almost pure profit

Most costs in developing software are fixed; variable costs are small; once break-even volume is reached, revenues from additional sales are almost pure profit

Provide modest level of technical support to users at no costProvide modest level of technical support to users at no cost

Rejuvenate revenues by periodically introducing next-generation software with features inducing PC users to upgrade their operating systems

Rejuvenate revenues by periodically introducing next-generation software with features inducing PC users to upgrade their operating systems

Test Your Knowledge

The fundamental issue surrounding a company’s business model is whether:

A. the strategy is capable of producing sustainable competitive advantage.

B. it matches the company’s external and internal situation.

C. the chosen strategy makes good business sense from a money-making perspective.

D. the company’s strategy and strategic moves are mostly proactive.

E. the company’s strategy stands a really good chance of hitting a home-run in the marketplace.

Tests of a Winning Strategy

Goodness of Fit test How well does strategy fit the company’s situation?

e.g. Adidas’s acquisition of Reebok

Competitive Advantage test Does strategy lead to sustainable competitive

advantage? e.g. GE’s continuous leadership position in almost all

industries it operates in

Performance test Does strategy increase company performance?

e.g. TCS’s increasing revenues and profits every quarter inspite of recession

Other criteria for judging the merits of a Strategy

Internal consistency and unity among all elements of the strategy

Degree of risk the strategy poses as compared to alternative strategies

Degree to which the strategy is flexible and adaptable to changing circumstances

Excellent execution of an excellent strategy is the

best test of managerial excellence – and themost reliable formula for winning in the

marketplace!