Nadia Bahgat SP Notes 2012

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Study Notes for StrategicPlanning Course

Modules 1 to 6

Author: Nadia BahgatGraduated: June 2012

!ail: nousa21"yahoo#co!Country: gy$t

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mailto:[email protected]:[email protected]


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Module 1: %ntroduction to Strategy& Planning andStructure

1#1 Strategic Planning: 'he Conte(t

Organisational Behaviour: organisations are run by people.Efectiveness relies on understanding motives and how they interact.Economics: Importance on three levels:

- Business afected by business cycle, interest rate, exchange rate,government policy, etc.

- ar!et operation, price determination, competitive "orces,efects o" mar!et structure

- E#ciency, marginal analysisMarketing:$elating product characteristics to mar!et demand. %inningand maintaining competitive advantageFinance:&uantitative evaluation o" alternative options

Accounting:E#cient resource allocation, isolating relevant costsProject Management: implementing pro'ects efectively in terms o"time, cost, (uality) map, assess and monitor ris!.

*+ is not independent o" all other disciplines.

1#2 )hat %s Strategic Planning*

omparable in complexity to economic decision ma!ing many "actorsand issues

- +ro/tability, sales growth, mar!et share, relative costs,

competitive position, pricing, environmental scanning, humanresource management, accounting ratios, investment appraisal,shareholder value, dividend policy

0pproach: merge business concepts to understand how companiesoperate in competitive environment

- evelop understanding o" inter-relationships- Explain why companies have succeeded2"ailed 3 how to operate

success"ully in "uture- 0dded dimension o" scope and complexity environmental

scanning

anagers4 e/nitions o" *trategy: 5nowing whereyou are going, and howyou will get there,

*etting clear objectives and mobili6e resources to achievethese ob'ectives,

Long-termthin!ing,

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+lacing yoursel" better in market place and compared tocompetitors,

*elect course of action.

Strategy: is "ormal, dynamic, adaptive to changing environment,

related to people, industry, culture, leadership, macroeconomicconditions, depends on correlating actions and outcomescause2efect, di#cult in business, and depends on behaviour o"competitors) about the un!nowable and unpredictable.'hree A$$roaches to Strategic Planning

1. Planning approach: prescriptive, rational ob'ectives li!e aspider, planning based- paralyses by analysis

- etermine ob'ectives- 0nalyse business environment- a!e "orecasts

- esign plan and pass down "or execution, adhered to time scale.0ssumptions:

- 8uture can be predicted accurate enough "or rational choice- +ossible to detach strategy "ormulation "rom everyday

managemento $elevant in"ormation can be extracted "or strategy ma!ers

- +ossible to "orego short-term bene/t "or long-term advantage- *trategies can be managed as proposed- E9 has !nowledge and power to choose "rom options, does not

need consensus- 9nce de/ned strategy decision does not need to change

- Implementation is distinct phase that only begins once strategyis agreed

his restrictive "ashion is unproductive

7. !ergent strategy:strategy is not planned but emerges in anunpredictable manner, learning 2 experimentation school o"thought. li!e a mon!ey: use logical incrementalism, extinctionby instinct

- ;o cause efect, little structure- anagers only can handle limited options- anagers are biased- anagers see! satis"actory not optimal solution- 9rganisations are coalitions o" interest groups, implementation

re(uires negotiation- anagers consider culture and politics as much as resources and

external "actors


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- Bounded rationality = rational based on limited incomplete,unreliable in"ormation, ma!e satis/cing decisions no moregained "rom more in"ormation search.

- 0lways directed towards general lines o" broad mission. ;eed a middle ground between trying to plan "or al un!nowns

and reacting to events as they occur.

+# ,esource-.ased strategy:- Emphasis lies on the internal resources o" the company, and the

competitive advantage lies within the resources, speci/callylabour 3 capital

- evelops ability to ta!e advantage o" opportunities and createnew opportunities via innovation.

/enitions of strategy: +lan into the "uture- %ntended strategy

+attern "rom the past, consistency- realied strategy Position- planning "or speci/c product in a speci/c mar!et

Pers$ectie- vision, holistic

Ploy- speci/c manueveur to beat-out competitors.

,ittell3s 'a!e And )ic4ed Pro.le!s:*+ problems are wic!ed problems because:

A.ility to for!ulate the $ro.le!:;o de/nitive "ormulation

,elationshi$ .et5een $ro.le! and solution: an be

"ormulated independently o" solution > ?nderstanding problem issame as solving it

'esta.ility:Either true or "alse ->- *olutions good or bad relativeto each other

inality: lear solution ->- ;o clear end and no obvious test

'racta.ility: Identi/able list o" operations can be used ->- ;oexhaustive identi/able list o" operations

7eel of analysis: an identi"y root cause ->- ;ever surewhether a problem or a symptom

,e$roduci.ility: an be tested over again as in a laboratory ->-

9nly one try: no room "or trial and error ,e$lica.ility: ay occur o"ten ->- ?ni(ue .

he 9rigins o" *trategy and actics*trategio = general) stratus = army, agein = leada!tos = ordered manoeuvreilitary context:

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*trategy is deciding what is to be done, actics is deciding how individual ob'ectives are to be achieved.

he diference between strategy and tactics isn4t clear cut in thebusiness context.

*trategy and the *cienti/c 0pproach

0pply scienti/c method to strategy ma!ing is "aced with manyintractable problems:

- iferent views o" strategic planning- $ange o" variables company type, environment enormous- *igni/cant interaction among variables- hanging variables combined with time lags between actions

and outcomes A di#cult to disentangle cause and efect

wo levels o" problem- *cienti/c method cannot provide de/nitive answers- ata not su#cient to test hypotheses

hallenges in *+:- hree approaches to strategic planning- %ic!ed problem- *cienti/c method cannot be applied

wo "undamental s!ills "or strategic planner- *ynthesis breadth across disciplines- Evaluation depth by applying models

1#+ 'he Process of Strategy and /ecision Ma4ing

*trategic decision ma!ing

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*trategy ynamics: omplex interdependent non-linear dynamicsystem

- ;ot random: deterministic2chaotic A not predictable- Even i" possible to pin-point strategic success

o ust ensure not temporary and can be sustained

- annot be expressed in mechanistic "ashion, howeversusceptible to structured analysis

iferent views o" strategy expressed in each "unction4s languageE9 must arrive at strategy supported by all, since all "unctions mustimplement strategy

*trategy challenges:- ?rgent day-to-day problem. ivert attention "rom overall

strategyE9 options:

- e"er strategic changes- 0mend changes moving target- Insist on strategy

Elements o" *trategic +lanning1. Structureo" thought to tac!le problems in their areas: Body o" theory introduces order to real-world complexity *tructure within which can establish priorities and identi"y

ob'ectiveso Dac! o" structure A reaction, arbitrary

aution: structure may be inappropriate or obsolete

7. ata analysis: ools and techni(ues to ma!e sense o" relationships and data elp to identi"y what is important2irrelevant on4t con"use rigour with numbers +recision is not essential ata can be: relative order o" magnitude, positive2negative,

(ualitative2(uantitative


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ompetitive benchmar!s invaluable

C. eed.ac4: *trategy may be modi/ed in "uture to any changes. aintain alignment with actual events

1#8 Business 9nit and Cor$orate Strategy

orporate strategy- etermine port"olio o" *B?s- 0llocating resources among *B?s- eveoping new bsuienss ventures- 0ppointing *B? E9s- $esource allocation

*B? strategy- %hat is mar!et

- %hich target segments- %ho is competition- ow to sustain competitive advantage- ay be independent o" other business units

ommon themes among orporate and *B? strategies:Interpreting diverse in"o, allocating resources efectively, reconcilingthe short and long-terms.evelopment o" orporate *trategies because bene/ts o" overallcorporate must be higher than costs, or else brea! up the corporate to

smaller companies, ie, stand alone *B?s.

1# /eelo$!ent of Strategic %deas1CJs: ivisionalisation, decentralisation1HJs: iversi/cation: rationale = synergy elusive, ris! spreadingmanagement rather than shareholder1KJs: +ort"olio planning: slow economy, high inLation, complex,unpredictable, search "or balanced port"olio1MJs: $estructuring) a!eovers many "ailedstrategiesA9pportunity, delayering, divestment

1Js: ore business: one approach "ocus on related diversi/cation noguarantee against value destruction)

- 0lternate view: only 'usti/cation "or diversi/cation is sharingresources and particular competitive advantage

+arenting advantage:- *tand-alone inLuence: inter"erence destroys value- Din!age inLuence- 8unctional and services inLuence

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- orporate development activities) most new ventures, 30Globalisation

- ;o guarantee o" economy o" scale- ;o guarantee si6e will produce competitive advantage

7JJJs: 5nowledge: 5nowledge management.

1#6 %s Strategic Planning ;nly for 'o$ Manage!ent*

here are potential returns to both the company and the individual"rom comprehension o" strategic planning at all levels o" management.

+rocess o" de/ning plan potentially more valuable than plan- Better understanding o" individual manager o" opportunity costs,

collaboration re(uirements, balanced view o" other groups,elimination o" unnecessary conLicts

- ?nderstanding o" manager o" overall plan improves ability to

position, de"end re(uests, select which proposals mostappropriate- Easier "or manager to adapt to environmental changes and

deduce impact

Better understanding o" company direction to all helps:- +redict changes- 0lign proposals 2 re(uests A improved support

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Module 2: Modelling the Strategic Planning Process

2#1 'he Modelling A$$roach

odel provides structure within which problems can be analysed.

*+ model is an attempt to rationali6e the complex processes o" acompany4s decision- ma!ing process, where there are no cause2efectrelationships

- 0ttempt to rationalise complex processes, ma!ing it simpler andmore understandable.

he omponents o" a odel

%ea!nesses: goals may be invalid

*trength: no better approach, identi/es main components

8eedbac! potentially most important element, notions rede/ned astime progresses.

*teps not necessarily consecutive

Bene/ts o" modelling planning structured- +rovides structure- *impli/es complex processes- 0cts as a chec!list

- Identi/es areas o" disagreementosts:

- echanistic impression- Introduces rigidity to dynamic process- Gives impression strategy can be derived "rom model

SP Model


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Strategists:%ho decides to do whatN @ types o" strategists: +rospector: Identi/cation and exploitation o" new mar!et

opportunities innovative, pioneer, ris!-ta!ing. 0nalyser: has a sophisticated internal in"ormation system and

detailed investigation o" options prior to action, slower and moreplanning involved.

e"ender: aintaining and de"ending current mar!et share andposition o" company, no high priority o" exploiting new mar!etsopportunities.

$eactor: deals with circumstances as they arise and maybeefective in a rapidly changing competitive environment.

$esearch into managerial styles and approaches- ?nable to identi"y causal relations between behaviour and

outcomes

anagement roles:- *trategist, entrepreneur, goal setter- 0nalyser competition, environment- *trategy decision ma!er advisor- Implementer and controller resource allocation- ommunicator

*trong leader is recurring "actor o" success"ul companies.

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Analysis and /iagnosis:;eed relevant macro and industry data, to be able to identi"ycompetitive position.

Generic Strategy Alternatie:

Expansion, retrenchment, combination, stability. hen optiongeneration and criteria to weigh options. thats the ow

2#2 Strategy Ma4ingompany OevolutionP:

- *mall2entrepreneurial = controlled by owner- Integrated = owner controls strategy, delegates operations- iversi/ed = ob'ective criteria, product2mar!et decisions are

delegated to businesses, "ormali6ed managerial systems, *rather than owners, more bureaucratic procedures, ability tounderta!e radical innovation hindered.

*trategic planning: multidimensional, multilevel

onLict inherent in process: e#ciency vs efectiveness, rules vs.Lexibility, mission and ob'ectives vs. $ewards and controls.

)hat !a4es decision !a4ing strategic*

1. Breadth: *trategic vs operational7. ime "rame: long term vs short term


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9ther sta!eholders include: Dabor employees, customers,creditors e.g., ban!s, bond holders, suppliers, regulators,and the community at large.

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Module +: Co!$any ;.


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Each statement implies diferent allocation o" resources and mar!etingapproach.

*ometimes mission statement describes status (uo or describesmanagement OwishP the organi6ation to be in the "uture must be

attainable.

Disaggregating the Mission: ission statement applies to wholecompany, it is very general, but it must be modi/ed to be able to beapplied to individual parts e.g. "unctional deparments

Setting Objectives:*tated as measurable per"ormance targets, thusintroduces accountability into business. 9b'ectives are how we achievethe mission. ust *0$, (uanti/ed, highest level ob'ective is *$.

+#+ 'he Ga$ Conce$t

Gap: diference between expected and desired "uture states. %hat has

to be accomplished in order to achieve speci/ed ob'ectivesNa. %hat the desired "uture state is at a speci/ed time in the "utureb. 0nalyse the state the company is li!ely to be in at that time in

the "uture i" no changes in the strategy ta!e place.

he diference between a and b is the gap, closing the gap is theob'ectives O%hat i"P scenarios.

0"ter identi"ying gap, we as! three (uestions:- oes the gap arise because o" external or internal "actorsN- oes the company have potential resources to close gapN

- an a strategy be developed which will close the gapN

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9utcome is on the vertical axis. It could be anything, pro/ts,growth, etc.

ime is on the hori6ontal axis. *trategy starts by determiningwhere we are today relative to where we have been. Given thiscurrent path you can antici$atewhere you will be in the "uture.

*trategic planning de/nes the goal o" where you want to be anddetermines the path to get you there. It answers ho5 youclose the ga$.

It may turn out that identi/cation o" the gap results in amodi/cation o" the company ob'ective

o because it transpires that the gap cannot be closed)o there is continual "eedbac! between ob'ective setting and

gap analysis.

losing such a gap may imply su.stantial rede$loy!ento"resources and changes in mar!eting strategy.

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Internal gap- Inappropriate allocation o" resources- Insu#cient (uantity or (uality o" resources to achieve desired

ob'ective- urrent incentive system usually aligned to expected state rather

than desired state, may be necessary to change incentives topromote gap closure

External gap "actors- an be too great to constrain

o $eduction in mar!et si6e, product prices- ay be possible to counteract

o 0ggressive competitor actions, government intervention

It is not 'ust the company4s ability to ac(uire and deployresources which is important, but the timing involved.

By combining gap analysis with the dynamic scenario approach itis possible to esti!ate the ti!ingo" resource ac(uisition andreallocation re(uired to achieve a desired "uture state.

By ta!ing a view on the "uture course o" events it is possible toidenti"y ritical *uccess 8actors *8.

his helps to avoid the emergence o" production bottlenec!s,s!ill shortages and /nancial headaches which typically besetcompanies during the process o" change.

o can ma!e it possible to identi"y when commitment to acourse o" action can be delayed) the chance to hedge

$ositionscan have signi/cant implications "or successand "ailure.

+#8 Credi.le ;.


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+# >uantia.le and Non->uantia.le ;.


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maintain mar!et share at the current level and ta!eover a!ey competitor.

C;,P;,A' ;BJC'%= 0chieve target $9I UE0;*: aintain mar!et share 2

a!eover competitorsU 9;*$0I;*: Existing productive

capacity 2 *harply increasing marginal cost 2 urrent highdebt ratio SB9 ;BJC'%=S

aintain existing mar!et shares 2 ontrol costs U9;*$0I;*: ;o investment capital

SA7S ;BJC'%=S aintain mar!et shares 2 ut mar!eting expenditure

P,;/9C'%;N ;BJC'%=S Increase productivity $educe inventories

+#@ 'he Princi$alAgent Pro.le!

9b'ectives o" head(uarters versus individual managers. Ex: sales manager see career prospects being dependent

on maximising sales ar!eting manager may /ght against a cut in mar!eting

expendituresanagers versus managers conLicting ob'ectives:

*0DE* 9BVEIFE* U Increase mar!et share +$9?I9; 9BVEIFE*U $educe inventories 0$5EI;G 0;0GE$ igh inventory level

0nother example: E9 - remuneration pac!age includes a bonus "orgrowth in current pro/ts, so he may reduce expenditure on $3.

+# Means and nds

%hat is to be achieved ought to be diferentiated "rom, ow it is to beachieved)

an lead to con"usion as to the nature o" ob'ectives.Ex: ause and efect

ob'ective o" 1C per cent rate o" return on investment. happy and stable wor!"orce, or by being associated with

high (uality productsQI* means to an end.

+#10 Behaioural ersus cono!ic and inancial ;.


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- E#cient communications- Good labour relations- ontent wor!"orce- *ocially conscious public pro/le

7. cono!ists a$$roachthat ob'ectives must be primarilyexpressed in economic or /nancial terms, otherwise- not related to mar!et conditions,- do not indicate the e#ciency o" the resource conversion process.

here is no right or wrong approach to setting ob'ectives, but acompany which does not meet minimum economic and /nancial ob'ectives

!ay not stay in .usinesslong enough to be rescued by behavioural

attributes.

+#11 cono!ic ;.


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aximising problems are the search cost o" obtaining in"o, and thedynamic environment that changes so "ast that time is insu#cient "oranalysis.

+#12 inancial ;.


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how much o" its scarce resources to devote to anyparticular end.

whether this allocation o" resources is e#cient. may generate a paternalistic attitude in large companies

which is contrary to the concepts o" "reedom o" action upon

which the notion o" the mar!et system is based. *el" interest o" the shareholders. compete against rivals who are pursuing a purely pro/t

maximising set o" ob'ectives) this means that the companywill have higher relative costs.

the company goes out o" business and shareholders losetheir wealth, the attempt to achieve social ob'ectivesbecomes rather pointless and sel" de"eating.

he underlying issue here is what is re"erred to by economists asSeDciency ersus eEuity3.

he eDciencyissue is concerned with maximi6ing the

output o" goods and services. he eEuityissue is how the output should be distributed

among members o" society.

+#18 Sta4eholders0 variety o" individuals and groups have an interest in the organi6ationand the way in which it is managed, and those individuals and groupsare categori6ed as the stakeholders.

Each sta!eholder has a diferent type o" interest in the company. ;ot necessarily expressed in /nancial terms.

+ossibility o" conLicts o" interest.wo distinct issues:

which interests are most important how sta!eholders "eelthe company should be run

the inLuence which sta!eholders have on the operation o"the company how the company is actually run

apping *ta!eholders sta!eholders needs to be identi/ed and prioritised. sta!eholder analysis can be mapped precise location is a sub'ective 'udgment, but identi/es

clusters o" sta!eholders, who may there"ore re(uire asimilar degree o" consideration, and outliers.

0ny movement can be trac!ed over time identi"yingchanging power structure con"ronting the company.

+recise location o" sta!eholders is sub'ective

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*hareholders: highest priority control supply o" capital but o"tenshort-term viewanagers: igh impact decisions, but there is a mar!et "or managersEmployees: an be replaced on labour mar!et*uppliers: epends on bargaining power o" supplier substitutes,

number... ustomers: Dow priorityreditors: only need assurance debts will be services. ;o otherinterestDocal community: mutual dependency, valid sta!eholder interestGovernment: Interest: pay taxes, abide by law) no sta!eholder interestunless civil service*ta!eholder InLuence: ex. trade unions, interest groups- inLuenceo"ten in conLict

interest, D inLuence: in"orm

inLuence, low interest: gra6e interests to ma!e use o" the inLuencethey have. inLuence, interest: manage efectively.

+#1 thical Considerations In the complex world o" business it is usually very di#cult to

de/ne appropriate moral codes o" conduct. oral issues are neer si!$leto resolve) any management issues are related to !oral dile!!as, but

these are o"ten to do with society generally rather than theindividual company.

*ome companies i!$ose a code of ethicson their employees,such as never accepting .ri.es.

+#16 Are ;.


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Measura.le: ability to evaluate achievement using numbers,rates, "re(uencies or percentages. Ex. 1JT mar!et share-- someobjectives are b" their nature non$%uantifable& such as 'to havea happy and stable wor!"orce4.

Achiea.le: which employees believe can be reached, leading

to commitment to achieve it--di(erent things can a##earachievable and credible to di(erent people. ,eleant: lin!ed to the organisation4s strategy and achievement

o" the ob'ective is seen to move the business towards its goalsalignment-- it is clearl" im#ortant that objectives are alignedith the resource capabilities o" the company = or the other wayround.

'i!e-.ound: measured against an agreed time "rame, not only"or the ultimate deadline but "or stages along the way. Ex,Sachieve 1J per cent mar!et share in 8rance a"ter one year and7J per cent a"ter two years-- hile it ma" a##ear to add

defnition to the objectives to relate them to a time scale it hasto be recogni6ed that it is impossible to predict the "uture withany degree o" certainty.

In practice it is unli!ely that ob'ectives will meet these strict criteria"ully.

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Module 8 - 'he Co!$any and the cono!y

8#1 'he Co!$any in the cono!ic niron!ent*ystematic view involves much !ore than general a5areness.

niron!ental Scanningprovides in"ormation which can be used toconstruct PS'- Political& econo!ic& social& and technologicalreview o" the environment and ';P- eniron!ental threat Fo$$ortunity $role.

In the "ace o" this (uantity o" infor!ation: identi"y i!$ortant aria.les, si!$lifythem as "ar as possible, and sub'ect them to

a$$ro$riate analyses

8#2 ,eenue and Costs: 'he Basic Model

Economy-wide changes can have signicant eects on reenuesand costs.

he !odelis constructed by identi"ying the variables whichdetermine revenue and costs and determining the "actors whichafect these variables.

$evenue A total mar!et x mar!et share x price9utlay A number o" wor!ers x wage rate

W units o" capital x priceW units o" material x price

Variable Determining factors:'otal !ar4et:;ational income) 8oreign national income) +opulation)+re"erences) ompeting products) +roduct li"e cycleMar4et share:+rice) ar!eting expenditure) ar!eting strategies)ompetitor mar!eting expenditure) ompetitor strategiesPrice:emand conditions) ompetitive reaction) ompetitiveadvantage) ar!et segmentation)or4force:Dabour mar!et conditions) $egional supply variations)%age rate ofered) %or!ing conditions)age rate:Dabour mar!et conditions) ?nemployment rateCa$ital:apacity o" the capital goods sectorCa$ital $rice:apital mar!et conditionsMaterials: apacity o" suppliersMaterials $rice: aterials mar!et conditions

his analysis answers the "ollowing (uestion: what mar!et should webe inN

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8#+ 'he )or4ings of the cono!y

$easons "or analysing economy- istinguish between internal and external inLuences afecting

company

- Identi"y opportunities and threats- Economic context necessary to interpret expert predictions- he problem "acing the manager is:

o to decide 5hich infor!ation is releant,o inter$ret itin order to "orm a view on what is happening

in the economy as a whole.

)*+*, -nderstanding and -sing Economic .n/ormationinimum: view o" current state o" economy

- E.g. unemployment, industrial output, consumer spending- apacity 2 volume planning depends on extrapolation o" trends

)*+*0 Su##l" and Demand in the Econom"+otential "ull employment G;+

- I" all resources "ully employed no excess capacity, actual Apotential

hree elements o" unemployment- *tructural: large scale disruptions when industries "old or close- 8rictional: 'ob search, transition- emand-related: diference between actual and potential output

)*+*+ -nem#lo"ment and .n1ation%hen mar!et economy approaches "ull employment, supplybottlenec!s emerge

- Increased wage rates, capital costs, material prices, so inLationincreases

- emand-pull inLation: too much money chasing too "ew goods

Phili$s cure1CJs:inverse relation between inLation andunemployment1KJs stagLation: +hilips curve shi"ted9ne explanation is that the curve moved due to expectations that

current inLationwould continue. ence unemployment stayed high.

+olicy was then to shi"t bac! +hillips curve = by eliminating theexpectation o" continuing inLation.

By maintaining growth o" money supplyconstant-OmonetaristP approach.

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Increase unemployment rate and wait until inLation"ell.

InLation depends on:- ?nemployment demand-pull- Dast period4s wage inLation cost-push: production costs

- Dast period4s inLation expectations.

)*+*) 2he .nternational Econom"ompanies are afected by the international "actors = e($orting&i!$orting $roducts or ra5 !aterials& co!$eting in internal!ar4ets 5ith i!$ortersQetc.

,elatie %nHation ,ates- which are not reLected in theexchange rates = afects costs and prices.

($ort and /% decisionsmay be impacted by these "orces. (change ,ates luctuations= not determined by Balance o"

rade but by international capital Lows, relative interest rates

and expectations%hile di#cult to plan accurately, scenario $lanningallows "orcontingencies. *ome companies argue they are not in the fore( .usiness-

these will miss an opportunity to hedge so!e ris4svia "uturesand "orward options.

%hile it will not be possible to cover future e(change ratesentirely, currency ris!s should be identi/ed as any other ris! andincorporated in the decision-ma!ing.

Competitive advantage of nations:+orter4s iamond odel,competitive position geographically concentrated, dependent on @"orces:

1. Domestic factor input conditions:those are the "actorsprovided by the nation "or companies to wor! with, competitiveadvantage inherited via country, includes raw materials, labor,physical in"rastructure.

7. !elated and supporting industries:clusters in country o"supply chains, enters o" excellence that create competitiveadvantage o" nations.


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o angers o" protectionism is that local companies have littleincentive to retain competitive advantage ex India4s autoindustry, Eastern Bloc economies

+orter identi/ed ways in which a nation can afect competitiveness

o" a company: 0 /rm4s home nation plays a critical role in shaping

managers4 perceptions about the opportunities that can beexploited by supporting the accumulation o" valuableresources and capabilities and creating pressures on the/rm to innovate, invest and improve over time.

he impact o" the history and environment o" a country iso"ten obvious.

%hen assessing its international competitive position, a companyneeds to determine whether its competitive advantage is due to

country speci/c or company speci/c attributes - "undamentallyimportant in exploiting "oreign mar!ets.

%here do I outsource and where do I sellN I" the advantage is country s$ecic- exploit mar!et by

exporting cost advantage. I" the advantage is co!$any s$ecic it can inest in the

country concernedprovided that these advantages can betrans"erred "rom one country to another.

(change rate uncertaintycan inLuence location decisionsbecause producing in the country where the company sells itsproducts insulates it "rom potentially un"avorable exchange rate

movements. ecision ma!ers thus have to trade of perceivedcompetitive advantages against exchange rate ris!s.

8#8 orecasting: )hat )ill Ia$$en Ne(t*0ccurate predictions di#cult, even vague predictions can be valuable0ll "orecasters share same poor trac! record

- end to "ollow rather than predict change- ;o connection between model complexity and accuracy

/irection of changeis important in its own right)o it may be possible to go "urther and predict the di!ension

of change,o +redicting an increase or a decrease is the !a


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1. iscover one statistic which serves as a reasonableindicator o" what is li!ely to happen next - leadingindicator

7. hin! in terms o" the .usiness cycle seriesdeco!$osition

yclical pattern o" boom 3 depression < components: general trend over time, theunderlying smooth cycle, and randomLuctuations due to economic policy, exchangerates,....

%hat is the underlying cyclical $atternN %hat rando! inHuencesare li!ely to be

disturbing the trendN

;eeds to be less deterministic and more probabilistic, do morescenario planning.

%e can "orecast technology and products emerging, however can4t"orecast social cultural trends.

8# PS' AnalysisIdenti/cation o" relevant "actors and interrelationships andinterdependency o" macro-variables.- what is !nown in theenvironment.Political: monopoly behaviour, labour laws&conomic"ocial:demographic composition, social norms typically (ualitative,

not (uantitative'echnological:continuous process but can be disruptive

8#6 niron!ental Scanninghe PS'analysis deals with what is !nown about the environment,niron!ental Scanningta!e this a step "orward by speculatingabout the "uture:

predict changes assess their implications 5ider range of aria.lesthan +E* longer term, predict beyond extrapolations

highly sub'ective early warning system, and allows "or mitigation measures S%hen it is correct, easily 'usti/es the resources which it

uses4.

8#? Scenarios+ro'ections are basis o" scenarios)*cenario is ;9 a "orecast, create picture o" possible "utures.

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Investigate implications o" possible "utures "or thecompany = O%hat i"P

*hort term issues = price reduction by a ma'or competitoron:

mar!et share

cash Low company4s pro/tability o" matching the pricereduction.

Dong term scenarios = much more speculative. *trategy options can then be tested in each scenario, thus

providing rational "or "uture positioning and options rue "uture can contain elements "rom each scenario ust trac! and monitor ritical to identi"y:

rends iscontinuities = it4s a trend until it bendsR

8#@ 'he cono!y and Prota.ility

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G;+ elasticity = responsiveness o" product demand to changes in G;+;ot whole story: not only si6e o" G;+ but distribution o" nationalexpenditure among its many components.

0nticipate competitor reaction to environmental changes e.g. pricecut

G;+ growth may lead to increased costs- %age rates in particular have a tendency to increase when the

unemployment rate is low, but not to decrease when theunemployment rate is high

8# niron!ental 'hreat and ;$$ortunity Prole: Part 1ethod o" systemi6ing how changes in the economic environmentmight relate to the company4s strategy.

*%9A E9+ economy layer W *0+ *trategic advantage pro/le-

strengths and wea!nesses afecting company4s internal structure

Frameork /or indenti/"ing /actors:1. ?se the +E* approach as a chec!list.7. 0pply macroeconomic ideas to economy wide inLuences.


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Module - 'he Co!$any and 'he Mar4et

#1 'he Mar4etar!et is principal mechanism "or resource allocation in industrialisednations.

- +rovides an understanding o" how mar!ets operate, via providingmanagers with insights into the behaviour o"

ustomers ompetitors $ole o" Government: %ea!nesses are basis "or legitimate

government intervention

0t the orporate Devel: 0re we in the right mar!etsN %hat resources should be allocated to various mar!etsN

0t the Business ?nit Devel %hat price should we be charging "or our productN4 ow much should we be spending on mar!etingN4

#2 'he /e!and Cure$elation between the $riceo" a good and the a!ountwhich would bebought at each price.

lastic:I" (uantity changes by a large relative amountwhen price is changed.

%nelastic:i" (uantity is not afected much by changes inprice.

what the elasticity tells is what happens to total reenuewhen price is changed.

he demand curve has important implications "or $ricing strategy#

Ceteris Paribus Conce$t: he approach o" allowing only one aria.leto change

while holding other things constant. +ower"ul method o" focusing on indiidual aria.les

and how they afect the company.

Demand (actorsthat result in a shi"t o" the demand curve:eterminants o" mar!et si6e largely outside company control

- +roduct li"e cycle- Business cycle- Exogenous shoc!s- G;+ elasticity- Exchange rates


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eterminants o" mar!et share can be inLuenced by company- +rice movement along the curve- ar!eting

Demand Curve and !evenue

ow responsive the (uantity sold will be to the change in price. elp predict the efect o" a change in price on the revenue "rom

selling the product.$evenue A +1 X &1 is greater or less than +7 X &7

Every straight line demand curve has a point at which reenueis !a(i!ied#

he manager can now thin! in terms o" whether revenues have beenmaximi6ed in current situation, and what might be done to maximi6erevenues in the "uture.

Demand Curve and )arket "hare

he emphasis in mar!eting strategy tends to be on !ar4et share&which is o"ten one o" the company4s strategies.

irect relationship between demand curve 3 mar!et share derived "rom similar in"ormation.

'he.asic !odel of inco!e: $evenue A otal mar!et X ar!et share

X +rice

'he de!and cure e($resses this as: $evenue A otal units sold X

+rice

%!$lication:"orces managers to be explicit about the expectedimpact o" price changes on the (uantity bought and eventually mar!et

share.

*ometimes a reduction in mar!et share is associated with an increasein pro/ts, via increase in price i" demand is relatively inelastic.

Demand Curve and )arketing &*penditurear!eting expenditure increases sales

- Exact shape o" response curve not usually !nown- *hi"ts demand curve to right- It becomes increasingly di#cult to achieve additional sales

through increases in mar!eting expenditure alone- ?sed to improve brand loyalty, thus ma!ing Obuyer more price

insensitive and ma!ing the demand curve more inelastic

steeper and shi"ting demand to the rightP = ultimate ob'ective

o" mar!eting expenditure.


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*hi"t along the curve: price

*hi"t o" the urve: +rice o" substitutes and complementary productschange total mar!etar!eting expenditure increases mar!et share at a given price

&stimating the Demand Curvehe manager should maintain a healthy cynicism o" statisticalapproaches to the demand curve "acing the individual company.

It may be possible to derive reasonable estimates o" the industrydemand curve.

#+ Co!$etitie ,eactionhe attempt to predict competitive reaction $resents !anydile!!as#

Important to be aware o" dilemmas- +rescription o" complex gamin rules not use"ul

Ga!e 'heory Game theory is a complex sub'ect) while it is highly

mathematical it provides important insights into behaviour. 0 well !nown example is the S6ero sum game4

0ny gain made by one party is at the expense o" the other. 0ttempting to "rame a game strategy companies are "aced with

potential costs and bene/ts all associated with a high degree o"uncertainty.

?tili6es competitors4 in"ormation o" all !inds 0 pro/le o" competitors4 strengths and wea!nesses can help

indicate the li!ely response to diferent courses o" action. ompany must be prepared "or a variety o" responses to any

competitive action.

But even with "ull in"ormation on competitors it can be impossible toarrive at an optimum strategy as illustrated in the +risoner4s dilemma

Prisoner3s dile!!a- police are trying to ma!e two suspects con"essto a ma'or crime:1- i" he con"esses:

0: he will go "ree i" the other remains silent B: he will go to prison "or K years i" the other also

con"esses7- i" he remains silent:


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0: he will be sent to prison "or 1 year on a minorcharge i" the other remains silent

B: he will go to prison "or 1J years i" the othercon"esses.

he point o" the dilemma is that: ;ot only does the situation lead to an outcome which is not in

the best interests o" either party, but experience does not lead toa diferent outcome.

Dessons "or business "rom dilemma:

he only way out o" this dilemma is to introduce another variable

which gives an incentive to stic! to the agreement. his variable

is the !nowledge that the situation will be repeated an un!nown

number o" times. %hy an un!nown number o" timesN

Because a"ter each 1 year sentence it is worthwhile to enter into

the agreement, but i" it is !nown that this is the last time then

both o" you will have an incentive to brea! it. 0 great deal o" stress is laid on trust and commitment in

cooperative business ventures.

he "undamental point o" the original dilemma is unaltered:

unless there is trust and commitment to a course o" action there

is always an incentive "or one party to brea! ran!s.

8inancial commitments also ofer disincentive o" brea!ing

relationship.

'he Kin4ed /e!and Cure9ccurs when we have:

- relatively "ew competitors- little operational meaning because its shape and position

depends on competitive reaction, which in turn cannot bepredicted.

- revenue is maximi6ed at the current priceo +rice Y +: low elasticityo +rice +: high elasticity

%!$lications on ,eenue: tradeof between giving up revenues nowin order to increase mar!et share, and the expectation o" higher


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revenues in the "uture when price can be returned to its original levelat the higher mar!et share.%!$lications on Pricing: necessary to ma!e a signi/cant pricechange and stic! with it. 9therwise the price change will have virtuallyno efect because o" competitor reaction. But the danger is that a

competitive pricing move may lead to a price war the outcome o"which is unpredictable.

Co!$etitie Pricing,* Price leadershi#:- ominant /rm initiates price changes- $etaliates against de"ectors- +enalising de"ector penalises all the small companies, which

utili6e passive pricing

0* 3imit #ricing:

- Entry barriers: low price deters entry- 9nly worthwhile i" cost advantage, Even then: (uestionablewhether it will be sustainable2optimal in long-term A game

+* Predator" #ricing:- rive new entrants and wea! competitors out o" business- $e(uires strength e.g. cash reserves or low costs

hese approaches represent extreme "orms that are rarer in practicethan in theory, competition can4t be avoided.


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#8 Seg!entationar!et segment: group o" consumers with common set o"characteristics, to the point where we can draw one single demandcurve "or them.

ar!et demand curve: sum o" mar!et segment demand curves

*egmentation characteristics:- Income, social class, geographical location, age, sex, "amily si6e,

education- i#cult to diferentiate price except by geography, or else will

end up with price discrimination

$e(uired characteristics to enable exploitation %dentia.le: su#cient common "eatures. /e!and related: at least one characteristic which

translates into demand terms. AdeEuate sie: to ensure attractive return on the

investment. Attaina.le: be reachable by available mar!eting and

advertising approaches

Key ste$s for carrying out a seg!entation analysis:1- Identi"y the ost Important *egmentation Fariables: +roduct 2segment 2 location or criteria- no general criteria7- onstruct a *egmentation atrix to identi"y segmentation gaps :0ny reasons "or the gapN


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he product position is never static in this graph, always moving.

I can diferentiate not via (uality but accessibility, no price at all ie.Google, or lower prices, customer experience.

Pricing in Seg!ents)hat is the o$ti!u! $rice to charge in each seg!ent*mar!et conditions difer among segments, diferent prices can becharged depending on price income elasticity.

i!$ortance of !ar4et rather than cost conditions 5hensetting $rices#

Economic demand , accounting costing and mar!etingsegmentation variables approaches can be integrated.

*egmentation is a potentially power"ul tool "or trans"orming a loss-ma!ing product into a pro/table product without changing anything

but the price charged to diferent groups o" consumers.

# Product >uality+roduct diferentiation through superior (uality

1. 'ranscendent +ualit$:+latonic ircular de/nition: can onlybe recognised in light o" experience.

7. Product ,ased +ualit$:Bundle o" product characteristics,however sometimes characteristics not determinants o" (uality,there can be very high costs associated with improving

dimensions o" (uality


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Garin3s di!ensions of Euality- +er"ormance- 8eatures- $eliability

- on"ormance- urability- *erviceability- 0esthetics- 9verall perceived (uality

>uality and Strategy&uality implications are not straight"orward

- +rice: not always correlated- 0dvertising expenditure: higher return on advertising "or high

(uality but may also be investment substitute

- ar!et share positively correlated with (uality- &uality and pro/tability as measured by $9I are correlated.

'otal >uality Manage!ent L'>M- Became more o" a philosophy than business techni(ue

o *uccess dependent on energy and commitmento *urveys: MJT o" initiatives "ailed

- 0ssociated "eatures do not produce competitive advantageo &uality training, process improvement, benchmar!ingo an be imitated by competitors

- Behavioural "eatures associated with advantageo 9pen culture, employee empowerment, executive

commitment- *ome initial success in eliminating ine#ciencies

o i#cult to /nd subse(uent costless improvements:cost2(uality trade-of

#6 Product 7ife Cycleshe product li"e cycle is a power"ul tool "or systemi6ing many o" thechanges in "actors by providing an overview o" the evolution o" themar!et "or a product, thus enabling managers to interpret the currentmar!et situation and "uture prospects in a structured manner.Zynamic, use"ul in capturing time dimension.

*ince industries are composed o" products the idea o" the li"e cycle canbe generali6ed to the industry level,

he stage in the product li"e cycle afects $rota.ility& ca$acityutiliation and co!$etitie reaction#


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he product li"e cycle model needs to be seen in the context o" the.usiness cycle.

here are various approaches to de/ning the product li"e cycle) someanalysts use the

pattern o" company sales,

others total mar!et sales, and others pro/t generation.

Stages:Decision Introduction Growth Transition Maturity Decline

Price Low Low Increase Market Market

Marketing High High Reduce Low Low

Capacity High High Reduce JIT Reduce

Investment High High Reduce Replacement Zero

ntroduction:- Investment in production and mar!eting o" product not brand to

create awareness- ;egative cash Low- igh uncertainty regarding mar!et, competition, pro/tability

.rowth:- 9b'ective: increase mar!et share- igh mar!eting expenses- Dow prices- ?nderutilised capacity

"hakeout:- %ea! /rms with no clear strategy sha!en out o" the mar!et.

)aturit$:- Gear productive capacity to demand VI- ompetitive advantage based on mar!et share- $educed costs A potential high positive cash Lows- 8ewer competitors, price wars, stable wor!"orce


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o reclaim aturity:0dd attributes, new segments, new uses, new mar!ets, reverseposition removing attributes, pushing price down.In maturity: need to lower costs via product innovation, consolidationstrategy, depart "rom my category, change positioning

Decline:- ecide on exit, phase-out

+roduct Di"e ycle model afected by business cycle, thus a"terdemand.

Basis "or de/nition- ompany sales, mar!et sales, pro/t- ar!et de/nition

o umulative sales, annual sales, sales value, unitnumbers, ...

+rediction o" shape and duration o" product li"e cycle is imprecise.Impacted by:

- *ubstitutes- echnology obsolescence- urability and replacement a"ter mar!et saturation

#? Portfolio Models

+ort"olio model are: Economic models o" demand analysis,diferentiation, segmentation based on comparative statics, they ta!edynamics into account explicitly.

'he ,C. !elative "hare .rowth )atri*$elative mar!et share in the context o" which stage we are in in the+D is source o" competitive advantage:

- Economy o" scale: higher mar!et share, higher productioncapacity thus lower average cost per unit.

- Experience efect: higher mar!et share, higher production, thusmore trained labour thus higher learning, better production

methods and techni(ues, higher experience curve---- oubleoutput leads to 7JT less in unit costs due to experience curve.

Growth stage:- 0ggressive selling strategy

o igher mar!eting expenditureo Dower price

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- Build capacity ahead o" demand- ;egative cash Lows

ature stage:- ar!et share becomes more secure

o $educe mar!etingo $aise prices

- %or! with VI, economies o" scale and experience efect.- igher pro/ts

BCG Matri(:

- /og:Dow mar!et share, low growth rateo ay still be pro/table

;iche "ragmented mar!et $elative e#ciency o" company

o I" not pro/table even though e#ciently produced then little"uture, divest

- >uestion Mar4:Dow mar!et share, high growth rateo 8uture is *tar or ogo &uestion is how much resources to allocate, they should

carry their own costs weights, but not general overheads.- Star:igh mar!et share, high growth

o aintain mar!et share until growth ceaseso igh mar!eting costs to "end of competition

- Cash Co5:igh ar!et share) low growth

o Economies o" scale, experience curve A relativelycostless competition, harvest.

;ther Portfolio Modelsore complex and more variables than BG BG- relies more onaggregate "actors

Mc4inse" #ort/olio model

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- Business *trengtho apacity utilisation, relative costs

- Industry attractivenesso Growth rate, pro/tability, cost trends, industry structure

7i!itations of Portfolio ModelsImplications not universal

- Based on assumptions, which may be violated ex. he og may be in a mar!et in which all si6es o"

company ma!e pro/ts) on the other hand the lac! o"barriers to entry may result in a ash ow beingcontinually under competitive threat.

- ;ot always economies o" scaleo ay be diseconomies o" scale

Portfolio Models and Cor$orate Strategy

+ort"olio selection is not a mechanistic process based on the selectiono" products as they appear in the BG matrix. here are manydi#culties involved:

port"olio decision will depend on the various ris4sinvolved, and the company4s attitude to ris4bearing.

the variables in the matrix do not capture all relevantproduct characteristics

9ptimum port"olio: ash cows generate cash to

satis"y shareholders and /nance *tars and &uestionar!s

iversi/cation comprised o" totally unrelated products may be

virtually unmanageable, there is no guarantee that the corporation is adding

value by including all o" them in the port"olio. should be lin!ed in such a way as to bene/t "rom the

co!$etencieso" the corporation.

Basis "or ompetitors analyses and competitor strategies competitors can be analy6ed - attac! their Sash

ow4R *tarsRQ analy6e competitors4 reaction and predict their

strategic moves.

+rincipal agent problem between corporate and *B?

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a star to an *B? might be dispensable "romcorporate port"olio point o" view.

/nso01s .rowth Vector

0 systematic approach to identi"ying the components o" the

port"olio strategy. the growth vector interpret the direction in which the company

intended to develop its port"olio.

Penetration:- ature mar!et, growth at expense o" competition- de"ender

o og A ash ow- Growth ar!et

o &uestion ar! A *tar- +ricing and mar!eting strategies

Product re#lacement:- E.g. product at end o" li"e cycle, so enhance existing product or

totally revise attributes or remove ones - customer satis"action is

!ey- Bluer ocean strategy ad, remove, eliminate, create

Market Develo#ment- ;ew geographical locations, segments, niches- where i have

competitive advantage via in"rastructure, demand, distributionchannels, etc..

- re(uires efective mar!et entry strategies

Diversifcation:- ?nrelated diversi/cation new mar!ets, new products

- no direct experience o" mar!eting strategy nor experience o"production

0ctual products ofer more insight than abstractions- +rice elasticity, income elasticity, mar!eting efect, competitive

conditions- ar!et si6e, growth) relative mar!et share, product li"e cycle

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inal Note on Portfolio Analysis:

- Integrate BG with +D "or company survival- ;eed to always maintain a balanced port"olio o" products at

diferent stages o" +D, or i" you have 1 product that gets into

decline stage, you get out o" business, so atch products in+ort"olio to have overlapping +Ds.

- In maturity- diversi"y, innovate, 30.- ompanies always need to grow to increase and maintain mar!et

shareo Dong-term potentiality view versus *hort-term pro/t

ma!ing reality

)e lin4 tools to:

1# Cross chec4 .et5een all !odels

2# 'o arrie to consistencies+# Co!e u$ 5ith ro.ust& consistent& and structured

strategic $lan#

#@ Su$$ly

?pward sloping supply curve: +A "&

- +osition and shape depend on production costs

- he slope o" the supply curve depends on the cost structureo"the companies in the industry.

'he %ndustry Su$$ly Cure and Strategyo any i!$ortantfactorsthat tend to change oer ti!e

which afect the elasticity o" the industry supply curve: the current level o" capacity utili6ation, the cost o" increasing capacity, the availability and wage costs o" additional

employees, the availability o" raw materials, the potential "or "oreign competitors to enter the

mar!et.*hi"ting the Industry *upply urveo 0ny "actor which changes costswill have an efect on the

supply curve = ex. price o" oil.

# Mar4ets and Prices

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In"ormation on industry supply and demand conditions can help assessimpact o":

- Entry o" competitors increase o" supply- Emergence o" substitutes decrease in demand

#10 Mar4et Structures

ar!et structure is main determinant o" long-term pro/tability

A# Perfect Co!$etition+roduct is homogeneous;o entry barriers;o economies o" scaleDow oncentration $atio8ragmentation o" power?niversal availability o" in"ormation

Darge number o" buyers and sellersemand curve is hori6ontal

- 8irm is price ta!er- &uantity is lowest average cost

o Intersection o" marginal and average cost

+er"ect competition is not realistic- But: use"ul as benchmar!- iferentiation and imper"ect consumer !nowledge

Identi"y imper"ections and capitalise on these "actors

- Entry barriers = enable monopoly pro/ts- ;on-homogeneity: product diferentiation

o +ac!aged services, e.g. maintenance and supporto ;ew "eatures e.g. + memory, colour, ...

B# Mono$oly

emand curve slopes down: /rm is not price ta!er.igher concentration $atio;o in"o to buyeronsolidation o" power+ro/t maximisation: where marginal revenue meets marginal cost

Entry o" competitor monopolistic competition- %ould push demand curve down- %ould also afect cost side competition "or input

C# ;ligo$oly8ew competitors in mar!et: Game theory, prisoner4s dilemma, and!in!ed demand apply

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Barriers to ntry"tructural barriersoutside control o" /rm:

- *i6e o" mar!et- *uc! costs exit costs

o Exit barriers 'ust as important as entry barriers

- Degislation or tacit agreement e.g. 9+E- Economies o" scale- Experience efect: ost advantage o" /rst movers

"trategic barriers- $eputation- +ricing: Dimiting or predatory- %hile competition usually cannot be avoided in the long run,

entry deterring strategiesmay provide su#cient time "or thecompany to .uild u$ !ar4et share and achiee scaleecono!ieswhich might not have been possible had entrantsbeen enticed into the mar!et earlier.

- the long term efectiveness o" such actions is doubt"ul.

Contesta.le Mar4ets0 mar!et in which entry costs are not sun!, and e(it can beachieved costlessly.

- 8ear o" hit-and-run raids "orces low prices- +er"ectly ontestable ar!et never ofers the incumbents more

than the normal rate o" pro/t.- his explains why many companies which apparently have a

monopoly do not actually ma!e monopoly pro/ts)

#11 'he ,ole of Goern!ent0lthough the !ar4et is an eDcient resource allocator, there aresome areas in which it does not appear to "unction very well- Oar!et8ailureP issues.

0n understanding o" this aspect o" government is an important inputinto

+E* analysis environmental scanning) scenariosplanning

Goern!ent and ,ule Ma4ing: 8ramewor! o" rules within whichcompanies operate.Employment law: *tatutory rights 3 obility o" labouronopoly Dawsealth and sa"etyDaws*eparation o" management and ownership +rincipal 2 0gent

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- Extent to which manager can be made responsible toshareholders

Daws changes when governments change

Goern!ent and ,egulating:Externalities: costs and bene/ts which do not accrue to parties inexchange

- +rivate cost versus social cost, ie: attempt to reduce pollution

%here pollution occurs, it is the outcome o" Se(ternalities3, i.e. costsand bene/ts which do not accrue to the parties involved in anexchange.

Priate cost Lactually paid by the company, Social costthe cost to the company plus the cost to the

environment.

%here externalities occur there is a case "or government actionin some "orm. It may simply be to Sinternalie the e(ternality,

I" not possible, government intervention may ta!e the "orm o": regulating output, setting emission standards, or imposing taxes designed to e(ualise private and social

cost.

anagers should have an awareness o" the externalities in theirindustry and whether these are li!ely to be sub'ect to governmentregulation in the "uture

Goern!ent and Allocating:0nother area o" mar!et "ailure occurs when it is not possible to excludenon-payers "rom consuming a good or service.

he provision o" $u.lic goodsis one o" the legitimate roles o"government.

But it is also important to the individual company, which shouldrecogni6e when it is entering a mar!et where public goods areinvolved.

#12 'he Structural Analysis of %ndustries+orter4s view is that: the collective strength o" these competitive "orcesdetermines the ability o" /rms in an industry to earn rates o" return oninvestment above the opportunity cost o" capital.

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Industry

SuppliersThreat of

Substitute Products

and /or Services

Buyers

Potential

EntrantsThreat of e!

EntrantsBargaining Po!er

of Buyers

Substitutes

Bargaining Po!er

of Suppliers

- there is a close connection between the /ve "orces approach andthe analysis o" per"ect competition, because it identi/es areas o"imper"ection where + doesn4t exist.

- ow is the dollar pro/t divided how much do supplier ta!e,buyer ta!e, competitors ta!e, distribution channels ta!eN

- *tatic snapshot but helps in understanding the dynamics andimplication on strategy "ormulation.

+orter4s /ve "orces- hreat o" new entrants- "actors that afect potential new

entrants:o Economies o" scaleo $egulationo Entry priceo echnological "actors e.g. $3 costso ;ew entrants can be a real threat i" they already have a

competency in the industry, ie) pepsi in bottled water they

have !now-how o" bottled drin!s, and strong distributionchannels

rop prices and diferentiate, bring in new capacity to gainmar!et share

hallenge to raise barriers but not drop pro/ts via: supplyside economics o" scale, demand side bene/ts, increasingswitching costs, higher 5 re(uirements, dist. hannels,restrictive government policy.

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- hreat o" substituteso echnological progresso 9ne way o" assessing the potential "or substitutes is to use

the product characteristics approach to assess whetherthere are characteristics o" the /nal product which uni(uely

depend on the production process.o $educe the total si6e o" the mar!et Invest in $3, explore continuities and discontinuities.

- *upplier bargaining powero epends on the degree o" competition in supplier mar!ets,o It is clearly important to determine whether the /rm is

paying more or less "or its inputs than other /rms in theindustry.

o 0re they concentratedN oncentration ratioo onopoly o" inputs: labour unionso onopsony: when i am the sole purchaser o" the input.o *eller more power"ul when: more concentrated, non-

dependency on one industry, high switching costs,diferentiation, threat o" "orward integration.

;eutrali6e via standardi6ing my inputs to have moresuppliers, supply chain integration.

- Buyer bargaining powero o have some !nowledge o" the characteristics o" demand

and buyer power.o +rice elasticity:o Income elasticity: is the product a necessityN igher

income elasticity, higher buyer bargaining power.o In"ormation:o Brand identity:o ;umber o" buyerso *witching costso +erceived diferentiation Expand services so that customer can4t leave me,

diferentiate, higher promotional expenditure.- Industry competitive rivalry

o Darge number o" relatively small /rms: approximates toper"ect competition.

o 0 "ew large /rms: competition among the "ew, withimplications "or competitive reaction.

o 9ne dominant /rm: monopoly or price leadership.o 0nother dimension is the extent to which /rms are able to

segment the mar!et by diferentiating their product. rop prices and diferentiate

7ife Cycle stage Co!$etitie Actions ,ialry

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Into 1stmover DowGrowth ompeting "or increased mar!et

share

igh

ransition ompeting to establish cash cow ighaturity e"end position Dow

ecline +rotect sales rather than mar!etshare

igh

$ivalry can be 6ero-sum game price wars pr positive sum gameproduct diferentiation.ust de/ne industry boundaries, assess economies o" industry, to wor!around possible imper"ections and reap bene/ts or de"ned positions.ust be able to manage "orces and "ocus o" company eforts will be on"orces with high threatsommon "ailure is lac! o" recognition o" changes in balance andrealignment o" strategy

an be used "or industry pro/ling "or company x now and a"ter some

number o" years: his expected change in the pro/le would be the

outcome o" analy6ing the +E* "ramewor! and environmental

scanning.

Criticis!s of the ie orces Model- gives the impression that all "orces are e(ually important- its o!

because the model gives a structure within which inLuences areestimated.

- "ocuses on threats rather than cooperation and alliances- its o!because the model helps identi"y competitive "orces notproviding a prescriptive solution.

- internal issues such as human resources and e#ciency: its o!because the rational o" the model is overall view o" competitivepositioning.

#1+ Strategic Grou$sany /rms in an industry but not all o" them may be directcompetitors. 9ne approach is to identi"y strategic groups: are

companies within an industry with similar strategic characteristics, or"ollowing similar strategies or competing on similar bases.

e/ne !ey dimensions o" characteristics and strategy- 9rganisation: scale, degree o" vertical integration, diversi/cation,

distribution channels- +roduct characteristics: (uality, image, level o" technology- 8inancial structure: return on assets, gearing

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0dvantages o" this tool:a;eed to detangle competitors in industry so that I /nd the group thatI can benchmar! mysel" against) andb 8ind industry gaps, ie) room "or opportunity and business

development.

#18 irst Moer Adantage(irst )over:inventing ompany or early entrant in development orgrowth phases. = +rospector type. 8irst that launched product, not!nowing where it will be in the price - diferentiation atrix.

0dvantages:- *etting industry standards, associated brand with product.- Economies o" scale- 8aster learning curve so economies o" learning- experience

efect.

osts:- Experimentation, $3- eveloping production techni(ues- ar!eting o" an un!nown product

0 later entrant sometimes gains Ssecond mover advantage1 by nothaving to bear the same level o" $3, "ailure and ris! and withconsumer awareness having been aroused by the /rst mover.

#1 An ;erie5 of Macro and Micro Modelshe macro modelsare used to identi"y trends and changes in thevariables which afect the mar!et in which the company operates.

he micro modelsare speci/c to the industry and identi"y thecompany4s position within its immediate competitive environment.

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#16 %s Co!$etition Changing*ompetition more severe because: now !nown as hyper or dynamiccompetition

- the increased pace o" technological change)- improvements in communications- the internet)- Globalisation.

yper-competition:- 0re mar!ets becoming more per"ectly competitiveN

- 0re product li"e cycles becoming shorterN- 0re the /ve "orces becoming more power"ulN

ompetition always changing so we must have the tools and strategiesto deal and manage such competition.

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#1? niron!ental 'hreat and ;$$ortunity Prole

E9+: method o" systemi6ing diverse in"ormation in order to "ormulatean overall strategic view.

%hile the E9+ has not provided ready made answers to strategy, ithas enabled us to bring together many ideas in a "ramewor! whichma!es it possible to identi"y !ey issues in context.

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Module 6 - %nternal Analysis of the Co!$anyhe external macro and competitive environment is the setting withinwhich the company mobili6es its resources in pursuit o" competitiveadvantage

atching resources with capabilities and opportunities in the

mar!et *%9 hus obtaining "oundation "or pro/tability 3 competitive

advantage.

6#1 ;$$ortunity Costhe best option "oregone is the opportunity cost o" the course o"action.

onstraints on the resources re(uire choice amongstalternatives.

elp identi"y relevant tradeosand establish $riorities.

he idea can be used to ealuate resource allocationoptionsat all levels in the company) 8rom the strategy ie5$ointit helps to "ocus on the "ollowing

(uestions: Save we identied all releant o$tionsN4 and SIo5 do

the o$tions co!$arewith each otherN4

6#2 i(ed Costs& =aria.le Costs and Sun4 Costsisconceptions:

- Each product should bear its share o" overhead A misallocationo" resources

- onsidering sun! costs in decision ma!ingi(ed costs: overheads, costs that don4t vary with changes inproduction levels rent=aria.les costs:costs that vary with production levels inputs, rawmaterialsSun4 costsare the costs which were incurred in the past, and as aresult cannot vary with respect to output.

- Expenditure on development incurred last (uarter is a sun! cost,and there"ore has no bearing on whether to continue developinga product.

- *un! costs are a particularly important strategic consideration

"or barriers to entry) i" the costs o" entry are recoverable thenthey are not sun! as "ar as the strategic move is concerned.

- he "act that a cost was incurred in the past does not necessarilyma!e it sun!

%hen ma!ing strategy decisions it is obviously important to ma!e surethat the appropriate costs are ta!en into account)

6#+ Marginal Analysis

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9nly relevant costs not average costs should be considered indecision ma!ingarginal cost excludes /xed cost

excludes /xed cost = hence signi/cantly lower thanaverage cost.

used as a guide to the minimum acceptable price. arginal costs di#cult to (uanti"y

he bene/t o" thin!ing in marginal terms is that it "ocuses on the costsand bene/ts associated with speci/c actions.

he additional amount gained "rom the sale o" each additional unit is!nown as !arginal reenue, arginal revenue di#cult to estimate

*hort run: productive capacity is constant. 9nly variable inputs canchange

Dong run: marginal costs allow inputs to vary, even the /xed costs.

Marginal cost $ricing= one of prices ex. otel night

6#8 /i!inishing Marginal Product0dding "actor input yields diminishing returns when productioncapacity is /xed

- E.g. hectare o" land with additional wor!ers at x point yieldssame production and because too many wor!ers, becomesine#ciency and yields diminishing marginal returns.

Important in:- etermining scale o" the company4s operations.- $esource allocation "or *B?s

o 0llocate until marginal product o" *B?s is e(ual- optimumallocation

6# Prot Ma(i!isation+ro/t maximi6ing output is that where marginal cost e(uals pricearginal costAmarginal revenue

he two (uestions that are really about pro/t maximi6ation: S%hat are the additional expected costsN4 and S%hat are the additional expected revenuesN4

;otion o" pro/t maximi6ation is concerned with: e#cient resource allocation given the tastes and pre"erences o"

consumers)

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Everyone can be made better of through the pursuit o" pro/tmaximi6ation, since this leads to the most e#cient use o"resources in an economy.

6#6 sti!ating Production Costsiferent views o" 0ccountants and Economists:

- arginal versus average costso Economist: arginal costs allows assessment o"

contraction2expansion optionso 0ccountant: 0ll costs must be allocated A average costs

more appropriate- 8uture versus historical costs

o Economist: *un! costs are irrelevant, historical costs onlyuse"ul i" good predictor o" "uture

o 0ccountant: Ignoring any historical costs will distort picture

he general principle to apply is that i" the company accountingsystem does not provide in"ormation which is consistent with economicconcepts there is a good chance that mista!en decisions will be made.

- he classic case o" 'oint production is that o" a sheep, whichproduces both wool and mutton)

he !ey problem is cost allocation - 0n example is actiity .asedcosting LABC, i" the resources devoted to a particular output cannotbe identi/ed, neither can the costs.

the manager should be aware that allocated costs may beirrelevant "or decision ma!ing purposes.

it may not be possible to identi"y variable costs separately,because "actors determining unit cost are complex andinterconnected

*trategic Implications: it may not be possible to produce certain products on their

own 0nd2or compete efectively with those produced under

conditions o" 'oint production.

6#? Accounting 'echniEues: Brea4-een& Pay.ac4& andSensitiity

%e must as! two main (uestions:1. Is the new product a "easible propositionN7. %hat is the ris! it "aces and what does its success depend onN

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NPV:Basis "or determining whether a pro'ect should be underta!enand "or election o" competing pro'ects.

,reak-&ven /nal$sis:otal costA *ales x Fariable cost W 8ixed ost

otal $evenues: otal *ales x +rice8ixed costA *ales x +rice = F

Brea4-een units C LPrice =C C Net Contri.ution

Brea!even 0nalysis: Sow many units would have to be soldbe"ore the product starts ma!ing a net contributionN4

Is total sales re(uirement attainable be"ore the product ma!es apositive cash contributionN based on the mar!eting in"ormation.

Brea!even analysis is obviously limited in that it concentratesonly on the volume o" output and sales, and does not ta!e into

account the passage o" time

Pa$back Period Sow long will it be be"ore the pro'ect pays bac! its start up

costsN4 he paybac! period is the length o" time until the running total

becomes positive. here is some dispute as to whether the paybac! period adds to

the in"ormation produced by a properly executed net presentvalue analysis.

%hat is important is to generate in"ormation on diferent aspects o"investments so that corporate decision ma!ers can arrive at a wellbalanced view o" the implications o" diferent courses o" action

Issues:- Ignores discounting but can be included- Ignores post-period cash Lows

"ensitivit$ /nal$sis %hen ma!ing predictions about the "uture it is not possible to be

precise, but it is possible to have some idea o" the range o"

values li!ely to be associated with important variables. 0t the very least, the best possible and worst possible scenario

"or each important variable can be pro'ected. *ensitivity analysis is related to the investigation o" scenarios,

but is conducted at a more detailed level. *ensitivity analysis can be carried out in relation to diferent

dimensions o" per"ormance.

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power"ul techni(ue "or generating a perspective on the potentialreturns "rom a course o" action.

It identi/es which are the crucial variables, and whereunexpected threats may exist.

0 somewhat less obvious aspect o" sensitivity analysis is to

identi"y the combination o" circumstances which are necessary toensure success.

6#@Accounting ,atios8ormal tool o" /nancial appraisal in determining how resources shouldbe deployed in the "uture. ?se"ul in:

1. +rovide in"ormation on diferent dimensions o" companyper"ormance.

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$evenues and costs must not include changes in the port"olio o"assets) which is not directly related to the e#ciency with which inputsare being converted to outputs - disguise a particularly good or badyear.

6# Bench!ar4ing0 company4s competitive position can only really be assessed inrelation to other companies in the industry.

he per"ormance o" ma'or competitors can be ascertained "romthe in"ormation in their annual reports.

It is necessary to ensure that li!e is compared with li!e. 0re port"olios similar 0re there synergies not easily identi/ed *ame li"e-cycle stages, competitive conditions

here is no guarantee that competitors are pursuing best

practice.he type o" (uestion which needs to be addressed includes:

%hy are competitors4 return on capital greater or less thanours, and what does this tell us about our own use o"resourcesN

ow does competitors4 /nancial strength in terms o"gearing, cash reserves etc. compare with ours, and whatLexibility does this give themN

0t least two reasons why benchmar!ing must be treated withcaution:

impossible to compare li!e with li!e due to diferent

port"olios, products, synergies, stages in li"e cycleQetc It is how per"ormance is achieved, rather than the "act that

it is being achieved, which is needs to be identi/ed, butthis is very di#cult to achieve.

6#10 ,esearch and /eelo$!ent

*chumpeter: Sreative estruction4, whereby periods o" comparative(uiet are punctuated by shoc!s when old sources o" competitiveadvantage are destroyed and replaced by new ones.

e argued that the entrepreneurs who exploit the opportunitiescreated by the shoc!s go on to achieve positive pro/ts during thenext period o" calm.

hus dynamic resource allocation is more important than statice#ciency.

hus one o" the re(uirements "or achieving competitive advantage isto adopt an innovative stance

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recogni6e new ideas and changes be ready to implement them when they occur.

ue to technological progress and in"ormation technology the sourceso" competitive advantage are being eroded at an increasing rate.

see! to achieve a se(uence o" temporary advantages that

!eep it ahead o" the rest o" the industry.wo stages to the problem o" allocating resources to research: ow much to spend on researchN %hat criteria to use in order to identi"y potentially

pro/table products "rom the possibilities produced byresearch given insu#cient resources to exploit all potentialproductsN

/rst come basisN constant percentage o" total costs, or total sales =

*imple, however arbitrary because could lead tomisallocation o" resources.

potential returns "rom research expenditure

opportunity cost o" research expenditure tradeofs-problem is that largely unpredictable and distant"uture.

a complicating "actor: 'oint production involved inresearch pure research and development output:+roduct research versus pure research

spill-over efect: the higher is research expenditure,the lower the development expenditure re(uired toattain a given development ob'ective.

Bringing these various "actors together, the (uest "or e#ciency inresearch expenditure can be assisted by identi"ying the most importantindicative "actors and assessing their relative importance:

,esearch ($enditure: %ndicatie actorso easurement o" research expenditureo +ast research budget: constant or variableo Expenditure as proportion o" sales, total costo rac! record o" new ideaso *pillover efects with developmento +ower base o" research personnel

Development+roduct development starts when: the product is selected "ordevelopment "rom the prototype stage and o"ten continues a"terlaunch and throughout the product li"e.

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In order to maintain mar!et share, companies continually upgrade theirproducts in line with new technologies and customer expectations.

$esearch outcome is the prototype, then we commence indevelopment process, which involves the "ollowing (uestions:

o ow much to spend on developmento %hen to launceo +rice to chargeo ar!eting efort

+roduct development conLicts:- evelopment engineer: &uality maximisation A +eer reputation- 8inancial controller: Economical ost within budget- ar!eting manager: Early launch A /rst mover advantage- orporate manager: 0lternative use o" resources, developer and

mar!eting motivation

ow much should be spent on developing itN4 he /rst step is to apply the microeconomic concept o" marginal

analysis, and concentrate attention on marginal cost andmarginal bene/t.

he decision to increase development expenditure by one dollarmust be based on the implicit assumption that the marginalbene/t is at least one dollar.

Expected marginal bene/t might be estimated by assuminglaunch date, expected mar!et share, unit cost and selling price.

ris! and uncertainty must be "aced by using sensitivity analysisto identi"y the impact o" diferent assumptions

$esearch, innovation and development can be brought together into asingle model.

his whole process can be termed Sinnovation4 because eachstage re(uires new thin!ing.

%hen viewed as a process two distinct management problems becomeapparent:

each stage must be managed efectively

the lin! between stages must be e#cient

%nnoationas stage-gate process:- %nention: incentives "or disclosure, I+$

o Invention to prototype: screening mechanism- Prototy$e: criteria to determine potential

o +rototype to patent: is delay 'usti/ed or bypass this stepN- Patent: de/nition o" invention, limitability

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o +atent to development: prioritisation in developmentprogramme

- /eelo$!ent: ow much to spendo evelopment to launch: conLict between engineers and

mar!eting

- 7aunch: iferentiation and priceo Daunch to mar!et exploitation: abandon or add resources

- Mar4et e($loitation:

6#11 Iu!an ,esource Manage!entEfective human resource management is important "or strategy "ortwo reasons:

1. people in a company are a resource li!e any other and howefectively that resource operates can be afected bystrategic change.

7. strategic changes are introduced and implemented bypeople, and resistance to change can exert a power"ulconstraint on success.

0daptability and the ability to cope with strategic change is a ma'orob'ective o" human resource management.

9ne o" the main characteristics o" an organi6ation is its culture. ulture is the set o" belie"s, values and managerial approaches)

$eLected in its structures, systems and approach to thedevelopment o" strategy.

erived "rom the company4s past history, type o" leadership, thepeople involved, its use o" technology and resources.

8our broad types o" culture = classi/cation helps in understanding howthe wor!"orce is li!ely to react to strategic change:

- Po5er culture:revolves around one individual or small groupo ommon in new 2 small companies also ;ewspaper

industryo *trategy based on dominant leadero Dac!s analysis, unpredictable

- ,ole culture:relies on committees, structures, application o"

logico Bureaucratic, civil service, old style retail ban!so *uitable "or stable environmento 9"ten does not recognise external changeso *low, resistant to change

- 'as4 culture:Lexible teams, tas! orientedo ultidisciplinary, limited duration companies

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o 0dvertising agencies, consultancieso 8lexible, change is norm

- Personal culture:individual pays little attention to theorgani6ation and is most concerned with sel" grati/cation

o $are, voluntary wor!ers, individual pro"essionals

o Individual doesn4t pay attention to organisationo Dac!s "ocus, unpredictable

%arning: "ailure in strategy implementation o"ten ascribed to OculturalproblemsP.

%hat might appear to be a cultural problem may in "act be dueto the more general principal agent problem, ex. the incentivesystem not aligned with strategic ob'ectives.

6#12 'he Sco$e of the Co!$any&conomies of scale$elation between average cost o" production and productive capacity

It is not merely the increase in productive capacity which isrelevant, but whether the higher productive capacity is based ona !ore eDcient co!.ination of la.or and ca$ital.

It may be that some larger companies have not selectedthe optimum co!.ination of in$uts#

i#culties o" !anagerial coordinationbeyond somecompany si6e ma!e it impossible to bene/t "rom potentialscale economies.

Barrier to entry "or others

&conomies of "cope cono!ies of sco$e:reduction in unit cost as the nu!.er of

$roductsis increased rather than the number o" units produced. $esemblance to synergy, %hy it may be cheaper to produce two goods than "or two /rms

to do so: possibility o" sharing in$utsamong several outputs .enets of good re$utation ,F/ s$illoerefects

enhanced ability to compete in a range o" relatedindustries with a coordinated strategyiseconomies o" scope due to: may result as scarce!anage!ent s4ills are s$readever more thinly especiallyin unrelated mar!ets.

&*perience curve

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- Experience urve, relates to the reduction in average costsresulting "rom the total volume o" output to date, degree towhich employees learn to do their 'ob more e#ciently over time.

o efect o" experience varies among companies andindustries)

o Empirical evidence: doubling o" output has the potential tolead to a 7JT reduction in average cost.

o ;ot linear: i.e. it ta!es successive doubling o" output toachieve the same proportional cost reduction.

Strategic %!$lication:o 0 company which "eels it has a cost advantage over rivals

should attempt to identi"y where the advantage is derived. I" it is "rom experience efects, the advantage can be

expected to decline over time) I" it is "rom economies o" scale the advantage will be

retained so long as competing companies do notincrease in si6e.

#h$ diversif$28irms need to con"ront the issue o" the o$ti!al degree ofdiersication.

our !ain incenties to diersify:o inimi6e ris! - anagement ris! not *hareholder ris!o apture economies o" scope = wor!s more with related

diversi/cation because o" !nowledge andrelatedness,however might lead to diseconomies becauseo" stretching management too thin.

o 0dd value through the parenting "unction- corporate headgood in managerial procedures and processes.

o Bene/t "rom synergy

"$nerg$he notion difers "rom economies o" scale and experience in that it isindependent o" the si6e o" the company, or o" the total output to date.

*ynergy should lead to the situation where a corporation is valued atmore than the sum o" the value o" its individual parts i" they could beseparated. 7 W 7 A C efect)

two problems:1. identi"y where the bene/ts o" synergy are li!ely to be

generated.7. little empirical evidence wish"ul thin!ingN

omponents o" synergy:

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- orporate managemento ay be identi/able a"ter the event but di#cult to predict

e.g. "or ac(uisition- Economy o" scale

o *cope, experience

- Fertical integrationo Economies: capacity utilisation, transport costs

- apacity utilisationo *pare capacity can be reallocated to other *B?

- Voint productiono erged operations "acilitates the sum o" the specialisations

- Innovative stimuluso ertainly possible, di#cult to predict

Empirical evidence o" synergy and $9I- otal synergy increases $9I) magnitude depends on speci/c

generating components and types o" business- *ales synergy increases $9I- 9perating synergy is mixed. Internal purchases depress $9I,

Internal sales have no efect.- Investment synergy depresses $9I- anagement synergy increases $9I- ;o business types bene/t across all "our dimensions.

8rom the strategy viewpoint, managers should con"ront claims thatbene/ts will accrue "rom synergy with (uestions about:

where the efects are li!ely to come "rom, what evidence exists that they will be signi/cant in this

instance.

Vertical ntegrationFertical integration relates to the part o" the supply chain which iscontrolled by a company. Every company is to some extent verticallyintegrated.

8orward integration occurs when company purchasesdistributors,

Bac!ward integration occurs when company purchases supply o"raw material,

he degree o" vertical

Nadia Bahgat SP Notes 2012

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