Strategic Management - V2

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STRATEGIC MANAGEMENT

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Module – 1

INTRODUCTION TO STRATEGIC MANAGEMENT (1 of 2)

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M1 - Introduction to strategic management

1.1 Strategic management basics1.2 Need for Strategic Planning1.3 Strategic Management Model1.4 Strategy formulation1.5 Business ethics and Strategic management1.6 Vision and Mission1.7 Setting Objectives1.8 Strategic Intent

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1.1 Strategic management basics

Plan(why ?

What ?

when ?)

Impleme

nt(To achieve

)

Review(w.r.t ?

)

Basic general work flow diagram

Modifications / Continue

CLASS DISCUSSION ON EXAMPLES of this model

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1.1 Strategic management basics (Cont’d)

Strategy : Potential actions that require top management decisions and large amounts of firm’s resources. A plan to win. Strategic Management is the set of decisions and actions used to formulate and implement specific strategies that will achieve a competitively superior fit between the organization and its environment.

Alternate definition The Art and Science of Formulating, Implementing, and Evaluating Cross-Functional Decisions That Enable an Organization to Achieve It’s Objectives

Strategic management is a 3 step process 1. Strategy formulation or Strategic Planning specifies the strategies for

achieving an organizations objectives2. Strategy implementation putting the strategic plan into action takes

place through the basic organizational architecture3. Strategic evaluation : comparing actual results with expected outcomes

after the implementation of the strategy.

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M 1.3 Strategic Management Model (Cont’d)

Analyze Internal Environment

Analyze External Environment

Vision / MissionStrategic Goals

Formulate StrategyImplement Strategy

Evaluate strategy

Strategic Competitiveness and

above average returns

Strategic management framework model

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1.2 Need for Strategic Planning

Strategy formulation or Strategic Planning Need : specifies the strategies for achieving an organizations objectives : If we fail to plan we plan to fail. A Strategic plan provides the following :-

1. A blue print / road map2. Role & responsibility clarity3. Helps an organization to take decisions on long range forecasts.4. Allows the firm to deal with a new trend and meet competition in an effective

manner.5. Helps the management becomes flexible to meet unanticipated changes.6. Efficient strategy formation and implementation result into financial benefits to

the organization in the form of increased profits.7. Focus in terms of organizational objectives and thus provide clarity of direction

for achieving the objectives.8. Organizational effectiveness can be measured against planned strategy9. It gets managers into the habit of thinking and thus makes them, proactive and

more conscious of their environment.10. Strategy formulation gives an opportunity to the management to involve

different levels of management in the process.11. Improved corporate communication, coordination and allocation of resources.

A Comprehensive Strategic Management ModelA Comprehensive Strategic Management Model

DevelopMission

Statement

DevelopMission

Statement

Establish Long-term

Objectives

Establish Long-term

Objectives

Generate,Evaluate,

andSelect

Strategies

Generate,Evaluate,

andSelect

Strategies

Establish Policies and

AnnualObjectives

Establish Policies and

AnnualObjectives

AllocateResources

AllocateResources

Measureand

EvaluatePerformance

Measureand

EvaluatePerformance

PerformExternal

Audit

PerformExternal

Audit

PerformInternal

Audit

PerformInternal

Audit

Feedback

Strategy Formulation Strategy Implementation Strategy Evaluation

M 1.3 Strategic Management Model

The Stages and Activities in the Strategic Management ProcessThe Stages and Activities in the Strategic Management Process

Stages Activities

Strategy formulation

Strategy evaluation

Strategy implementation

Conduct research

Establish annual

objectives

Review internal and external

factors

Integrate intuition

with analysis

Devise policies

Measure performance

Make decisions

Allocate resource

s

Take corrective

action


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Strategic management is a 3 step process

1. Strategy formulation or Strategic Planning : specifies the strategies for achieving an organizations objectives

2. Strategy implementation takes place through the basic organizational architecture (people, structure, policies, procedures, systems, incentives and governance) that makes things happen. Successful implementation rests on the shoulders of the managers who should be able to motivate the employees to perform at high levels. Time is of essence in strategy implementation.

3. Strategic evaluation : comparing expected outcomes with actual results after the implementation phase. It is a tool that leaders use to assess the effectiveness of an organizations strategy towards accomplishment of its goals.i. Review internal and external factors that are bases for the current

strategies that are bases for the current strategiesii. Measuring performance against stated objectivesiii. Taking corrective action

Dynamic nature of external environment demands periodic reexamination of all the elements.


Ten Key External ForcesTen Key External Forces

EconomicEconomic

SocialSocial

CulturalCultural

DemographicDemographic EnvironmentalEnvironmental

PoliticalPolitical

LegalLegal

GovernmentalGovernmental

TechnologicalTechnological

CompetitiveCompetitive


Fourteen Key Internal ForcesFourteen Key Internal Forces

ManagementManagement

MarketingMarketing

DistributionDistribution

Production/

Operations

Production/

OperationsResearch & DevelopmentResearch & Development

PurchasingPurchasing

ManufacturingManufacturing


Key Internal Forces (cont.)Key Internal Forces (cont.)

Finance/AccountingFinance/Accounting

PackagingPackaging

Computer Information

Systems

Computer Information

Systems

Employee/Manager Relations

Employee/Manager Relations

Human Resource

Management

Human Resource

Management

Vendor RelationsVendor

Relations

PromotionPromotion


Business MissionBusiness Mission

Strategy FormulationStrategy Formulation

External Opportunities and Threats

External Opportunities and Threats

Internal Strengths and Weaknesses

Internal Strengths and Weaknesses

Relationship between company’s Strategy and its business model

1.4 Strategy formulation

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Relationship between company’s Strategy and its business model (Cont’d)

Prerequisite elements for strategy formulation : Vision - where organization wants to be Mission - the purpose of the orgzn Long term goals / objectives - specific outcomes Results of environmental (external & internal ) audit - SWOT analysis

Good strategy will specify the following : Arena (focus area) Vehicles (how to get there) Differentiators Staging (speed and sequence of moves) Economic logic (returns)

The Basis for Good Strategic Decisions : Intuition + AnalysisKey decisions should not be rushed and too much emphasis should not be placed on gut feel / intuition. Strategic decision making needs a balance between rationality and intuition

1.4 Strategy formulation (Cont’d)

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Pitfalls to Avoid in Strategic Management• Using to gain control over decisions & resources• Doing only to satisfy regulatory requirements• Moving hastily from mission to strategy formulation• Failing to communicate to employees• Intuitive decisions that conflict with formal plan• Top management not supportive of process• Failing to use as standard for performance measurement• Delegating to a “planner” vs.. involvement of managers• Failing to involve key personnel• Failing to create collaborative environment• Formality that stifles creativity and flexibility


Benefits of Strategic ManagementBenefits of Strategic Management

1. - Improved Communication

2. - Increased Understanding

3. Enhanced Commitment

4. Greater Productivity

5. More Effective Strategies

6. Higher Productivity

7. Allow Firm to Influence, Initiate, and Anticipate

8. Be Proactive Rather Than Reactive


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Module – 1

INTRODUCTION TO STRATEGIC MANAGEMENT (2 of 2)

Ethics : Doing things which are considered right as per the society

Business Ethics : Principles of conduct within organizations that guide decision making

and behaviour.

Implementing Code of business ethics : Provides basis on which policies can be devised to guide daily behavior and decisions in the workplace

• Good business ethics is a prerequisite for good strategic management

• Good ethics is just good business • Strategists responsible for high ethical principles• All strategic processes have ethical ramifications• Formal codes of ethics are in place for many businesses• Internet privacy emerging as ethical issue of immense proportions

M 1.5 Business ethics and Strategic management

M 1.5 Business ethics and Strategic management (Cont’d)

Few unethical Business actions :

• Misleading advertising• Misleading labeling• Environmental harm• Poor product or service safety• Padding expense accounts• Insider trading• Dumping flawed products in the markets

How to Create an Ethical CultureHow to Create an Ethical Culture

• Develop a Code of Business Ethics• Ask All Managers and Employers to Sign the Code• Offer Business Ethics Workshops• Include Ethics Factors in Performance Appraisal Instruments• Link Compensation to Ethical Behavior• Encourage Whistle Blowing• Encourage Good Business Ethics Behavior• Publicize Good Business Ethics Behavior• Reward Good Business Ethics Behavior• Set a Good Example

M 1.5 Business ethics and Strategic management (Cont’d)

Mission statement answers the question:“What is our business?”Vision statement answers the question:“What do we want to become?”

– Many companies develop both– Shared vision can motivate employees– Develops a commonality of interests– Helps focus on opportunity & challenge

Developing Vision & MissionClear mission is needed before alternative strategies can be formulated and

implemented

Important to have as broad range of participation as possible among managers in developing the mission

M 1.6 Vision and Mission

Mission should do seven things1. Define what the organization is2. Define what the organization aspires to be3. Limited to exclude some ventures4. Broad enough to allow for creative growth5. Distinguish the firm from all others6. Serve as framework to evaluate current activities7. Stated clearly so that it is understood by all

Customer Orientation1. A good mission statement reflects the anticipations of customers.2. Identify customer needs3. Provide product/service to satisfy needs4. AT&T’s mission focuses on communications, not telephones5. Exxon’s mission focuses on energy, not on oil and gas

M 1.6 Vision and Mission (Cont’d)

Vision Statement “The Bellevue Hospital is the LEADER in providing resources

necessary to realize the community’s highest level of HEALTH throughout life.”

“The Vision of USGS is to be a world leader in the natural sciences through our scientific excellence and responsiveness to society’s needs.”

“It is the vision of the California Energy Commission for Californians to have energy choices that are affordable, reliable, diverse, safe, and environmentally acceptable.”


Mission Statement 1. “The Bellevue Hospital, with respect, compassion,

integrity, courage, honors the individuality and confidentiality of our patients, employees, and community, and is progressive in anticipating and providing future health care services.”

2. “The Mission of USGS is to serve the Nation by providing reliable scientific information to– Describe and understand the Earth– Minimize loss of life and property from natural disaster– Manage water, biological, energy, and mineral resources;

and enhance and protect our quality of life.”


Effective mission statements• Broad in scope• Generate range of feasible strategic alternatives• Not excessively specific• Reconcile interests among diverse stakeholders• Finely balanced between specificity & generality• Arouse positive feelings and emotions• Motivate readers to action• Generate the impression that firm is successful, has direction, and is worthy of

time, support, and investment•Reflect judgments re: future growth• Provide criteria for selecting strategies• Basis for generating & screening strategic options• Are dynamic in orientation


Components of mission “ Mission statements vary in LengthContentFormatSpecificityMission must include the 9 elements, as the mission statement is the most public

and visible part of the strategic-management process and must answer the corresponding questions

1. Customers : “Who are the firm’s customers?”2. Products or services : “What are the firm's major products or services?”3. Markets : “Geographically, where does the firm compete?”4. Technology : “Is the firm technologically current?”5. Survival, growth, and profitability : “Is the firm committed to growth and

financial soundness?”6. Philosophy : “What are the basic beliefs, values, aspirations, and ethical

priorities of the firm?”


9 elements (Cont’d)

7. Self-concept : “What is the firm’s distinctive competence or major competitive advantage?”

8. Concern for public image : “Is the firm responsive to social, community, and environmental concerns?”

9. Concern for employees : “Are employees a valuable asset of the firm?”

Mission vs. PurposeThe term purpose was used by some strategists. At some places, it was used as

synonymous to mission. A few major points of distinction are as follows:i) Mission is the societal reasoning while the purpose is the overall reason.ii) Mission is external reasoning and relates to external environment. Purpose is

internal reasoning and relates to internal environment.iii) Mission is for outsiders while purpose is for its own employees.


Importance of Vision & Mission

Although research results are mixed, firms with formal mission statements• 2X average return on shareholder’s equity• Positive relationship to organizational performance• 30% higher return on certain financial measures


VISION definition lays stress on the following:• Broad and all inclusive intentions• Vision is forward thinking process.

A few important aspects regarding vision are as follows:• It is more of a dream than articulated idea.• It is an aspiration of organization. Organization has to strive and exert to

achieve it.• It is powerful motivator to action.• Vision articulates the position of an organization which it may attain in distant

future.

Envisioning Strategic FrameworkThis is the process of creating vision. It is a difficult and complex task. A wellconceived vision must have:• Core Ideology• Envisioned Future


Core Ideology will remain unchanged. It has the enduring character. It consists ofcore values and core purpose. Core values are essential tenets of an organization.

Core purpose is related to the reasoning of the existence of an organization.Envisioned Future will basically deal with following:• The long term objectives of the organization.• Clear description of articulated future.

Advantages of having a Vision1. A few benefits accruing to an organization having a vision are as follows:2. They foster experimentation.3. Vision promotes long term thinking.4. Visions foster risk taking.5. They can be used for the benefit of people.6. They make organizations competitive, original and unique.7. Good vision represent integrity.8. They are inspiring and motivating to people working in an organization.


OBJECTIVES AND GOALSObjectives refer to the ultimate end results which are to be accomplished by the

overall plan over a specified period of time. The vision, mission and business definition determine the business philosophy to be adopted in the long run. The goals and objectives are set to achieve them.

MeaningObjectives are open ended attributes denoting a future state or out come and arestated in general terms. When the objectives are stated in specific terms, they

become goals to be attained. In strategic management, sometimes, a different viewpoint is taken. Goals denote a broad category of financial and non-financial issues that a firm sets for itself. Objectives are the ends that state specifically how the goals shall be achieved. Objectives are the manifestation of goals whether specifically stated or not.

Difference between objectives and goals1. The goals are broad while objectives are specific.2. The goals are set for a relatively longer period of time.3. Goals are more influenced by external environment.4. Goals are not quantified while objectives are quantified.

M 1.7 Setting Objectives

Need for Establishing Objectives1. Objectives provide yardstick to measure performance of a department or SBU or

organization.2. Objectives serve as a motivating force. All people work to achieve the objectives.3. Objectives help the organization to pursue its vision and mission. Long term

perspective is translated in short-term goals.4. Objectives define the relationship of organization with internal and external

environment.5. Objectives provide a basis for decision-making. All decisions taken at all levels of

management are oriented towards accomplishment of objectives.

What Objectives should be set?According to Peter Druker, objectives should be set in the area of market standing,innovation productivity, physical and financial resources, profitability, managerperformance and development, worker performance and attitude and publicresponsibility.


Profit Objective: It is the most important objective for any business enterprise. In order to earn a profit, an enterprise has to set multiple objectives in key result areas such as market share, new product development, quality of service etc. Ackoff calls them performance objectives.

Marketing Objective may be expressed as: “to increase market share to 20 percent within five years” or “to increase total sales by 10 percent annually”. They are related to a functional area.

Productivity Objective may be expressed in terms of ratio of input to output. This objective may also be stated in terms of cost per unit of production.

Product Objective may be expressed in terms of product development, product diversification, branding etc.

Social Objective may be described in terms of social orientation. It may be tree plantation or provision of drinking water or development of parks or setting up of community centers.

Financial Objective relates to cash flow, debt equity ratio, working capital, new issues, stock exchange operations, collection periods, debt instruments etc. For example a company may state to decrease the collection period to 30 days by the end of this year.

Human resource Objective may be described in terms of absenteeism, turnover, Strategic Framework number of grievances, strikes and lockouts etc. An example may be “to reduce absenteeism to less then 10 percent by the end of six months”.


Characteristics of Objectivesi) They form a hierarchy. It begins with broad statement of vision and mission and ends with

key specific goals. These objectives are made achievable at the lower level.ii) It is impossible to identify even one major objective that could cover all possible

relationships and needs. Organizational problems and relationship cover a multiplicity of variables and cannot be integrated into one objectives. They may be economic objectives, social objectives, political objectives etc. Hence, multiplicity of objectives forces the strategists to balance those diverse interests.

iii) A specific time horizon must be laid for effective objectives. This timeframe helps the strategists to fix targets.

iv) Objectives must be within reach and is also challenging for the employees. If objectives set are beyond the reach of managers, they will adopt a defeatist attitude. Attainable objectives act as a motivator in the organization.

v) Objectives should be understandable. Clarity and simple language should be the hallmarks. Vague and ambiguous objectives may lead to wrong course of action.

vi) Objectives must be concrete. For that they need to be quantified. Measurable objectives help the strategists to monitor the performance in a better way.

vii) There are many constraints internal as well as external which have to be considered in objective setting. As different objectives compete for scarce resources, objectives should be set within constraints.


Process of Setting ObjectivesGlueck identifies four factors that should be considered for objective setting. These factors

are: the forces in the environment, realities of an enterprise’s resources and internal power relations, the value system of top executives and awareness by the management of the past objectives. They are briefly narrated below:

i) Environmental forces, both internal and external, may influence the interests of various stake holders. Further, these forces are dynamic by nature. Hence objective setting must consider their influence on its process.

ii) As objectives should be realistic, the efforts be made to set the objectives in such a way so that objectives may become attainable. For that, existing resources of enterprise and internal power structure be examined carefully.

iii) The values of the top management influence the choice of objectives. A philanthropic attitude may lead to setting of socially oriented objectives while economic orientation of top management may force them to go for profitability objective.

iv) Past is important for strategic reasons. Organizations cannot deviate much from the past. Unnecessary deviations will bring problems relating to resistance to change. Management must understand the past so that it may integrate its objectives in an effective way.


STRATEGIC INTENTThe foundation for the strategic management is laid by the hierarchy of strategicintent. The concept of strategic intent makes clear WHAT AN ORGANISATIONSTANDS FOR, Harvard Business Review, 1989 described the concept in its infancy.Hamed and Prahlad coined the term strategic intent. A few aspects about strategicintent are as follows:It is an obsession with an organization.This obsession may even be out of proportion to their resources and capabilities.It envisions a derived leadership position and establishes the criterion, the

organization will use to chart its progress.It involves the following:Creating and Communicating a visionDesigning a mission statementDefining the businessSetting objectives

M 1.8 Strategic Intent

STRATEGIC INTENT (Cont’d)Vision serves the purpose of stating what an organization wishes to achieve in the long

run.Mission relates an organization to society.Business explains the business of an organization in terms of customer needs,

customer groups and alternative technologies.Objectives state what is to be achieved in a given time period.The strategic intent concept also encompasses an active management process that

includes focusing the organization’s attention on the essence of winning. The concept of stretch and leverage is relevant in this context.

Stretch is a misfit between resources and aspirations.Leverage concentrates, accumulates, conserves and recovers resources so that ameagre resource base can be stretched. Leverage reduces the stretch and focusesmainly on efficient utilization of resources.The strategic fit matches organizational resources and environment. This positions the

firm by assessing organizational capabilities and environmental opportunities. Under fit, the strategic intent would seem to be more realistic. It is hierarchy of intentions ranging from a board vision through mission and purpose down to specific objectives.

M 1.8 Strategic Intent

FEW DEFINITIONS

• Business Definition : It explains the business of an organization in terms of customer needs, customer groups and alternative technologies.

• Core Purpose : It is the reason for organization’s existence.• Core Values : It is the essential and enduring character of organization.• Goals : A broad category of financial and non financial issues that a firm

sets for itself.• Mission : It is the social reasoning of organization. It links organization to

society.• Objectives : What is to be achieved in a given time period. They are the

manifestation of goals.• Strategic Intent : It makes clear what an organization stands for.• Vision : What an organization wishes to achieve in the long run.

M 1 - Appendix

RELIANCE TECHNOLOGY CENTREReliance Industries Limited is the largest private sector in India and is the second largest manufacturer of polyester in the world. Reliance Technology Centre was set up in 1997 and presently is engaged in manufacturing PET homo and co-polymer fibres. The following is the vision and mission of the company.VISIONTo establish a centre of excellence for research and development in PET homo and copolymer fibres and resins through disciplined, motivated and time bound execution of projects;To create an environment conducive to intellectual growth, efficient flow of information and accountability in order to achieve a productive and sustained phase of research activities;To closely interact with the business group companies and technical for short, medium and long-term quality and process issues;To thrive to become a catalyst to the growth of company’s polyester business;To leverage synergy between Reliance’s PET, polymers and fibre intermediate business;To create, maintain and pursue strategic research alliance for top end research activities.MISSIONTo achieve ‘Global leadership in polymers, fibres and resin businesses’.

M 1 - Appendix

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Module – 2

External Assessment, Competitive Analysis(1 of 3)

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M2 - External Assessment, Competitive Analysis

2.1 External audit2.2 PEST Analysis2.3 Porter’s five forces model & Industry

Analysis2.4 McKinsey’s 7 S framework

Prediction is very difficult, especially about the future : Neils Bohr

External Strategic Management Audit also called– Environmental scanning– Industry analysis

External Audit:– Identification and evaluation of trends and events beyond control

of single firm• Increased foreign competition• Populations shifts• Aging society• Information technology• Computer revolution

M 2.1 External audit

M 2.1 External audit (Cont’d)

Purpose of external audit is development of Finite List of1. Opportunities2. Threats to be avoided

Key External Forces – 5 broad categories or PEST or PESTEL Analysis Framework

1. Economic forces2. Social, cultural, demographic & environmental forces3. Political, governmental, and legal forces4. Technological factors5. Competitive forces

Relationships Between Key External Forces and an Organization

Key External Forces

CompetitorsSuppliers

DistributorsCreditors

CustomersEmployees

CommunitiesManagers

StockholdersLabor Unions

Special Interest GroupsProductsServices

Opportunities&

Threats

M 2.1 External audit (Cont’d)

Performing an External Audit

Gather competitive intelligence on factors:– Social– Cultural– Demographic– Environmental– Economic– Political, legal, governmental– technological

M 2.2 PEST Analysis


Sources of information include:– Internet– Libraries (corporate, university, public)– Suppliers– Distributors– Customers– Competition

Key factors:– Vary over time– Vary by industry

M 2.2 PEST Analysis(Cont’d)


Variables include:– Market share– Breadth of competing products– World economies– Foreign affiliates– Proprietary account advantages– Price competitiveness– Technological advancements– Interest rates– Pollution abatement

M 2.2 PEST Analysis (Cont’d)

Key External Factors:

1. Oriented to long-term & annual objectives2. Measurable3. Applicable to all competing firms4. Hierarchical

• Overall company• Divisional or functional areas


Economic ForcesMonitor Key Economic Variables:

Availability of credit Level of disposable income Interest rates Inflation rates Money market rates Federal government budget deficits Gross domestic product trend Consumption patterns


Monitor Key Economic Variables:

• Unemployment trends• Worker productivity levels• Value of the dollar in world markets• Stock market trends• Foreign countries’ economic conditions• Import/export factors• Demand shifts for goods/services• Income differences by region/customer•


Monitor Key Economic Variables:

• Price fluctuations• Exportation of labor & capital• Monetary policies• Fiscal policies• Tax rates• ECC policies• OPEC policies• LDC policies


Social, Cultural, Demographic & Environmental Forces

Major impact on:

– Products– Services–Markets– customers



Consider:

United States—– Population growing older– Less Caucasian– Gap between rich and poor widening– 65 and older will rise to 18.5% of population by

2025– By 2075, no racial or ethnic majority



• World population > 6 billion

• U.S. population < 300 million• Great potential for domestic production

expansion to other markets

• Domestic only is a risky strategy



• NAFTA– U.S. exports to Mexico increased 170%– 2000, U.S. trade deficits:

• Mexico -- $25 billion• China -- $84 billion• Japan -- $81 billion

– 2001 Recession (U.S. and World)• > 60,000 laid off along Mexico Border with U.S.



Trends for the 2000’s –

– More educated consumers– Population aging– Minorities more influential– Local rather than federal solutions– Fixation with youth decreasing– Hispanics increase to 15% by 2021– African Americans increase to 14% by 2021


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Module – 2



Key variables –• Childbearing rates• Number of special-interest groups• Number of marriages• Number of divorces• Number of births• Number of deaths• Immigration & emigration rates


Monitor Key Variables

• Life expectancy rates• Per capita income• Attitudes toward business• Average disposable income• Buying habits• Ethical concerns• Attitudes toward saving


Monitor Key Variables • Racial equality• Average level of education• Government regulation• Attitudes toward customer service• Attitudes toward product quality• Energy conservation• Social responsibility• Value placed on leisure time• Recycling• Waste management• Air & water pollution• Ozone depletion• Endangered species


Political, Govt., & Legal Forces

Government RegulationKey opportunities & key threats

• Antitrust legislation (Microsoft)• Tax rates• Lobbying efforts• Patent laws

Increasing Global Interdependence

• Impact of political variables– Formulation of Strategies– Implementation of Strategies

Increasing Global Interdependence• Strategists in a global economy

• Forecast political climates• Legalistic skills• Diverse world cultures


Political, Govt., & Legal Forces

Globalization of Industry

• Worldwide trend toward similar consumption patterns

• Global buyers & sellers

• E-commerce

• Instant transmission of money & information across continents


Political, Govt., & Legal ForcesKey Political, govt., & legal variables:

• Government regulation/deregulation• Tax law changes• Special tariffs• Political Action Committees (PACs)• Voter participation rates• Number of patents• Changes in patent laws• Environmental protection laws• Equal employment legislation• Level of government subsidies• Antitrust legislation/enforcement• Sino-American relationships• Russian-American relationships• European-American relationships


Key Political, Government & Legal Variables

• African-American relationships• Import-export regulations• Monetary policy• Political conditions in other countries• Government budgets• World oil, currency, & labor markets• Location and severity of terrorist activities


Technological Forces

Revolutionary technological forces:

• Profound impact on organizations• Internet• Semiconductors• XML technologies• UWB communications


Technological Forces

Internet changes the nature of opportunities and threats –• Alters life cycle of products• Increases speed of distribution• Creates new products and services• Eases limitations of geographic markets• Alters economies of scale• Changes entry barriers

Capitalizing on Information Technology (IT)

– Chief Information Officer (CIO)

– Chief Technology Officer (CTO)

Technology-based issues

– Underlie nearly every strategic decision


Competitive Forces

Collection and evaluation of information on competitors is essential for successful strategy formulation

Competition in virtually all industries can be described as intense.Identifying rival firms

• Strengths• Weaknesses• Capabilities• Opportunities• Threats• Objectives• Strategies


Competitive Forces

Key Questions About Competitors:• Their strengths• Their weaknesses• Their objectives and strategies• Their responses to all external variables (e.g. social, political, demographic, etc.)• Their vulnerability to our alternative strategies• Our vulnerability to successful strategic counterattack• Our product and service positioning relative to competitors• Entry and exit of firms in the industry• Key factors for our current position in industry• Sales and profit rankings of competitors over time• Nature of supplier and distributor relationships• The threat of substitute products or services


Competitive Forces

Sources of Corporate Information:• Moody’s Manuals• Standard Corporation Descriptions• Value Line Investment Surveys• Dun’s Business Rankings• Standard & Poor’s Industry Surveys• Industry Week• Forbes, Fortune, Business Week


Competitive Forces

7 Characteristics of most competitive U.S. firms:

1. Market share matters2. Understand what business you are in3. Broke or not, fix it4. Innovate or evaporate5. Acquisition is essential to growth6. People make a difference7. No substitute for quality


Competitive Forces

Competitive Intelligence Programs:

• Systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’ own goals.


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Module – 2


Competitive Analysis: Porter’s Five-Forces Model

Potential development of substitute products

Rivalry among competing firms

Bargaining power of suppliers

Potential entry of new competitors

Bargaining power of consumers

M 2.3 Porter’s five forces model & Industry Analysis

Competitive Analysis: Porter’s Five-Forces Model

M 2.3 Porter’s five forces model & Industry Analysis

The five forces framework developed by Michael Porter is the most widely known toolfor analyzing the competitive environment, which helps in explaining how forces inthe competitive environment shape strategies and affect performance. These five forces are not independent of each other. Pressures from one direction can trigger off changes in another which is capable of shifting sources of competition.

1) Threat of New EntrantsEntry of a firm in and operating in a market is seen as a threat to the establishedfirms in that market. The competitive position of the established firms is affectedbecause the entrants may add new production capacity or it may affect their marketshares. They may also bring additional resources with them which may force theexisting firms to invest more than what was not required before. Altogether thesituation becomes difficult for the existing firms if not threatening always and therefore they resort to raising barriers to entry. These barriers are intended to discourage new entrants and this may be done by organizations, be in any one or more ways, as discussed below:

a) Capital Requirements: High investments required for a start up in any businessis another deterrent for new entrants bringing down the possibility of increasedCompetition.

Competitive Analysis: Porter’s Five-Forces Model (Cont’d)M 2.3 Porter’s five forces model & Industry Analysis

b) Economies of Scale: Firms which operate on a large scale get benefits of lower cost of production because of the economies of scale. Since the new firm normally would start its operation at a smaller scale and therefore will have a relatively higher cost of production, its competitive position in the industry gets adversely affected. This barrier created through large scale of operation is not only applicable for production side but it can be extended to advertising, marketing, distribution, financing, after sales customer service, raw materials, purchasing and Research and Development as well. For example, you would have noticed in durable industry the kind of investments which players like Samsung and LG do on advertising and promotions normally and specially during events like World Cup cricket match. This makes it nearly impossible for any new third player to launch and sustain such intensive and investment driven marketing attack.c) Learning or Experience Effect: The theory explaining the experience curve or the learning curve suggests that as firms produce they grow more efficient and this brings them cost benefits. The efficiency levels achieved is an outcome of the experience, which teaches the organization better ways of doing things. This again keeps any new entrant at a disadvantage. d) Cost Disadvantage Independent of Scale: New entrants may face disadvantages which are independent of the operations. It may be on account of the lack of proprietary product knowledge such as patents, favourable access to raw material, favourable locations, existing plants built and equipped years earlier at lower costs, lower borrowing costs etc.e) Brand benefits: Buyers are often attached to established brands. Differences in physical or mere perceived value make existing products unique and the new entrants have to tire out to beat such brands and change the mindset of the customers.


f) Switching Costs: Switching costs, which is nothing but the expenses (financialor psychological) which a customer incurs in switching from one seller toanother. Cases where such an expense is higher, new entrants find it difficult toestablish or survive. Such costs may be because of a strong brand association orthe comfort level a customer may be enjoying or it may be on account of aparticular technology like Windows operating systems which most customers useand therefore will find it inconvenient to switch to a system like LINUX soeasily.g) Access to Distribution Channel: Any such critical activity like distributionchannel in the business can be a barrier for the entrants when accessibility tothem is found to be difficult. Most existing firms in FMCG industry are found tohave a strong favourable distribution channels which is very difficult topenetrate. For example in India you can think of HLL which commands a deeplyentrenched distribution network.h) Anticipated Growth: Incumbents in a rapidly growing market are less likely torespond to a new entrant when the market’s growth offers enough opportunitiesto share. But a new entrant position will be opposite in a slowly growing market.In addition to the above, few general entry barriers exist in each industry’s case, forexample, regulatory policies, tariffs and international trade restrictions are few suchadditional factors.


2) Bargaining Power of SuppliersBusiness organizations have a large dependency on suppliers and the latter influence their profit potential significantly. Suppliers’ decisions on prices, quality of goods and services and other terms and conditions of delivery and payments have significant impact on the profit trends of an industry. However, suppliers’ ability to do all these depends on the bargaining power over buyers. Suppliers’ bargaining power would normally depend on a) Importance of the Buyer to the Supplier Group: The size of the supplies taken by a particular buyer is likely to put the buyers in a relatively advantageous position. The same may be found true if the supplier tends to get an image advantage by supplying to a particular firm. Consequently in dealing with such buyers, suppliers’ bargaining power is naturally reduced. Just opposite happens when buyer is not so important to the supplier and the latter then is less likely to offer favourable terms to win or retain the customer.b) Importance of the Supplier’s Product to Buyers: Here the position may just be opposite of the above situation where suppliers have a better bargaining power coming from their sheer size or image. c) Greater Concentration Among Suppliers than among Buyers: An industry, which is largely dominated by a few large firms is a highly concentrated industry. Such few firms hold greater power with them as the proportion of the industry’s total output is in hands of such large firms. This gives such firms greater power over those who do business with them. The converse is true when industry has low concentration in suppliers. A higher concentrated supplier position may be possible on account of the sources of raw materials available, R & D or patentrights available with fewer firms.


2) Bargaining Power of Suppliers (Cont’d)

d) High Switching Costs for Buyers: In this case buyers suffer because of thesuppliers’ advantageous position or by the nature of supplies itself, the buyershave to face a higher switching cost.

e) Credible Threat of Forward Integration by Suppliers: Suppliers in a given situation may see an opportunity in moving up the value chain and may seriously think of getting into the business of what its buyers have been doing till now. Any indication of that nature from supplier side puts the buyers at the receiving end as they feel threatened because of a new player in that market and of losing an assured source of supplies. A recent example may be of Reliance which hasdecided to move from exploration and refining of oil to selling of oil through its own retail petrol pumps.


3) Bargaining Power of CustomersCustomers with a stronger bargaining power relative to their suppliers may force supply prices down or demand better quality for the same price and may demand more favourable terms of business. For instance, there will always be a difference in the bargaining power between an individuals buying different construction material like cement, steel or bricks and a real estate builder buying them for the number of properties he may have been building over so many years. Few of the following facts attach greater power to buyers:a) Undifferentiated or Standard Supplies: A supplier, given the nature of products it supplies, may have a very limited choice in providing any differentiated products and this enables a customer to get the deal at the most favourable terms. In a perfectly competitive market situations with large number of suppliers, prices automatically are at their lowest.b) Customer’s Price Sensitivity: Customer’s buying behaviour vary with respect to their sensitivity to prices. Depending on how important the item is for the customer’s usage and proportion he may be spending on the item concerned, buyers’ sensitivity to price varies. Any customer with high price sensitivity gains advantage in its bargaining power.c) Accurate Information about the Cost Structure of Suppliers: A more informed customer is capable of negotiating with suppliers. Whenever such customers notice a decline in the supplier’s costs they would always bargain for a proportional decrease in price. This aspect is more relevant in today’s context of global markets where cost benefits can come from anywhere in the world at any point in time for various reasons. There may be a general decline in prices ofa product in world market because of a glut situation or somewhere some new discoveries may have pulled the prices down.


3) Bargaining Power of Customers (Cont’d)

d) Greater Concentration in Buyer’s Industry than in Supplier’s Industry and Relatively large Volume Purchase: This means that buyers are large and more powerful than suppliers. Government departments like police department when negotiating for large orders of security weapons or intelligence equipments will necessarily command a greater hold than its supplier as there will be only few number of such institutions buying them at a given point of time.

e) Credible threat of Backward Integration by Buyers: Different from forward integration which suppliers tend to attempt at, buyers in order to hold their position stronger in the market may integrate in backward manner. This will mean that the buyer extends itself to the previous stage of manufacturing or distribution for which it had been dependent on suppliers till now. An example could be of an entertainment channel which airs programmes outsourced from organizations producing them outside, get into the business of producing its programmes in house.


4) Threat of SubstitutesOften firms in an industry face competition from outside industry products,which may be close substitutes of each other. For example, with the newtechnologies in place now the electronic publishing are the direct substitutes of thetexts published in print. Similarly, newspaper find their closest substitutes in theironline version, though it may be a smart strategic move to position them ascomplementary products.However, the competitive pressure, which any industry may face, depends primarilyon three factors:1) whether the substitutes available are attractively priced;2) whether buyers view substitutes available as satisfactory in terms of their qualityand performance;3) how easily buyers can switch to substitutes.Generally it is observed that the availability and acceptability of substitutes determinean upper price limit to a product. When relative prices of the product in question riseabove that of the substitute products, customers tend to switch away from them.


5) Competitive RivalryThe level of rivalry is minimum in a perfectly competitive market where there are large number of buyers and sellers and the product is uniform with everyone. Same is true for a monopoly market where there is only one player and the type of product is also one. However in case of oligopoly or monopolistic competition, where you will find few players and the market conditions allow them to differentiate their products and services, competition if found to be fierce. Few of the following factors explain the level of rivalry:a) The Stability of Environment: An unstable environment is likely to call for a hyper-competitive situation and of the several factors that affect stability could be technological innovation, changes in government regulations, customers’ profile and their needs. In an industry which witnesses high movements in terms of entry or exit, the rules of the game may change too frequently. One of such instances of fierce competition could be noticed on account of the onslaught of new technologies like CDMA affecting the general environment of telecom industry in India. The entry of Reliance India Mobile with CDMA technology intensified the rivalry between telecom players to such an extent that the government had to intervene through its institution, Telecom Regulatory Authority of India (TRAI).b) The Life Expectancy of Competitive Advantage: There are industries for example consumer electronics or white goods in which the fruits of innovations do not last longer and hence the companies do not even bother to patent them. This has an adverse implication for the stability of the competitive environment leading to intense rivalry. Length of innovation cycle, patent protection or switching costs between rivals are few factors, which may impact the life expectancy of competitive advantage.


5) Competitive Rivalry (Cont’d)

c) Characteristics of the strategies pursued by competitors: This also has or may have an impact on the general approach to rivalry. For example, in a market segmented approach on part of the competitor leads to lesser rivalry situation. Also the kind of goals, which competitors pursue has an impact on the rivalry. Competitors pursuing the goal of increased market share will lead to increased rivalry again.

Lastly, few implications can be picked up from the five forces framework itself.Lower threats to entry or a higher possibility for substitutes have the potential of increasing rivalry. A lower engagement between supplier will result into a lesser rivalry. So will be the effect when buyers face higher switching costs.

In an overall assessment, two critical observations regarding rivalry can be made here.First a powerful competitive strategy employed by one rival can greatly intensify the competitive pressure on other rivals. Second, the frequency and rigor with which rivals use any or all competitive weapons at their disposal can be a major determinant of whether the competitive pressures associated with rivalry are cutthroat, fierce, strong, moderate or weak.

Global Challenge

International Challenge faced by Indian firms:

1. Import oriented companies- Rupee Dollar Fluctuation- Maintain competitive edge despite imports

2. Purely domestic market oriented companies- Export oriented companies

– How to gain and maintain exports to other nations

– How to defend domestic markets against imported goods

M 2.3 Porter’s five forces model & Industry Analysis (Cont’d)

Industry Analysis (EFE)

External Factor Evaluation MatrixSummarize & evaluate:

CompetitivePoliticalCultural

TechnologicalEnvironmentalSocial

GovernmentalDemographicEconomic


Industry Analysis (EFE)Five-Step process:

• List key external factors (10-20) Opportunities & threats

• Assign weight to each (0 to 1.0) Sum of all weights = 1.0

• Assign 1-4 rating to each factor• Firm’s current strategies response to the factor

• Multiply each factor’s weight by its rating• Produces a weighted score

• Sum the weighted scores for each Determines the total weighted score for the organization.

• Highest possible weighted score for the organization is 4.0; the lowest, 1.0. Average = 2.5


.201.20 Clinton Administration

.202.10 Bad media exposure from FDA

.102.05 Smokeless market SE region U.S.

.153.05 Production limits on tobacco

.202.10 Legislation against the tobacco industry

Threats

.303.10 More social pressure to quit smoking

2.101.00TOTAL

.604.15 Pinkerton leader in discount market

.051.05 Astronomical Internet growth

.153.05 Increased demand

.151.15 Global markets untapped

Weighted

scoreRatingWeight

UST—Key External Factors

Opportunities


Industry Analysis (EFE)

Total weighted score of 4.0 =Organization response is outstanding to threats & weaknesses

Total weighted score of 1.0 =Firm’s strategies not capitalizing on opportunities or avoiding threats

UST (in the previous example), has a total weighted score of 2.10 indicating that the firm is below average in its effort to pursue strategies that capitalize on external opportunities and avoid threats.

Important

• Understanding of the factors used in the EFE Matrix is more important than the actual weights and ratings assigned.


Competitive Profile Matrix (CPM)

• Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic position


CPM Avon L’OrealP&G

2.803.25

3.15

1.00Total

0.1530.20

40.05

10.05Market Share

0.4020.40

20.80

40.20Global Expansion

0.2020.40

40.40

40.10Customer Loyalty

0.4530.45

30.60

40.15Financial Position

0.3030.30

30.40

40.10Management

0.4040.30

30.30

30.10Price Competition

0.3030.40

40.40

40.10Product Quality

0.6030.80

40.20

10.20Advertising

ScoreRating

Score

Rating

Score

Rating

Weight

Critical Success Factor


95

ADDITIONAL INFORMATION

SLIDES

M 2.4 Mckinsey’s 7S framework


The PESTEL checklist can be used to analyze which factors in the environment are helpful to the unit, and which may impede progress of the unit in , achieving its aims. There is of course a danger, common to all checklists, that once an entry has been made under each of the headings it is deemed complete, regardless of whether or not the list reflects the complexity of the reality. Another common error in the implementation is that 'boxes' are completed without reference to the aims of the organization. This can lead to considerable expenditure of time and energy for little benefit.

Let us now discuss in brief Mckinsey's 7s framework. According to Waterman et al., organizational challenges is not only a matter of structure, although structure is a significant variable in the management of change. When we talk of an effective organizational change, we can see that it is a complex relationship between strategy, structure, systems, staff, style, shared values, skills and super ordinate goals. This relationship is represented ill a pictorial manner .

The framework suggests that there is a multiplicity of factors that influence an organizations ability to change and its proper mode of change. Because of the interconnectedness of the variables, it would be difficult to make significant progress in one area without making progress in the others as well. There is no starting point or implied hierarchy in the shape of the diagram, and it is not obvious which of the seven factors would be the driving force in changing a particular organization at a certain point in time. The critical variables would be different across organizations and in the same organization at different points of time.


In this context there may be a role for using 'McKinsey's 7s Framework' helping a Client , structure the analysis. Let us first discuss the concept of McKinsey's 7s framework in brief: Superordinate Goals: are the fundamental ideas around which a business is built; Structure: Salient features of the unit's organizational chart (e.g. degree of hierarchy, presence of internal market, extent of centralization/decentralization) and interconnections with the office; Systems: procedures and routine processes, including how information flows around the unit; Staff: Personnel categories within the unit and the use to which staff are put, skill base, etc.; Style: Characterization of how key Managers behave in order to achieve the unit's goals;Shared Values Strategy: The significant meanings or guiding concepts that the unit imbues on its members;Skills: Distinctive capabilities of key personnel and the unit as a whole.The 7s model can be used in two ways:• Considering the links between each of these one can identify strengths and weaknesses of an organization. No S is strength or a weakness in its own right; it is only its degree of support, or otherwise, for the other which is relevant. Anything that harmonizes with all the other Ss can be thought of as strengths and weaknesses.• The model highlights how a change made in any one of these will have animpact on all the others. Thus if a planned change is to be effective, then changesin one must be accompanied by complementary changes in the others.


Competitive IntelligenceIt is the information which is relevant to strategy formulation regarding theenvironmental context within which a firm competes. Such intelligence has severaluses:a) Providing description of the competitive environment that inform strategist andguide strategy formulation;b) Challenge common assumption about the competitive environment;c) Forecasting future development in the competitive environment;d) Identifying and compensating for exposed competitive weaknesses;e) Determining when a strategy is no longer viable or sustainable;f) Indicating when and how strategy should be adjusted to changing competitiveenvironment.

102


Module – 3

Internal Assessment (1 of 2)

103

M3 - Internal Assessment

Internal auditCompany analysisIntegrating Strategy and CultureValue Chain AnalysisInternal factor Evaluation analysis, Benchmarking

• Internal strengths/weaknesses• External opportunities/threats• Clear statement of mission

Parallels process of external audit

• Information from:

• Management

• Marketing

• Finance/accounting

• Production/operations

• Research & Development

• Management Information Systems

Nature of an Internal Audit : Basis for Objectives & StrategiesM 3.1 Internal audit

External Analyses’ Outcomes

By studying the external environment, firms identify what they might choose to do.

Opportunities and threats

Internal Analyses’ Outcomes

By studying the internal environment, firms identify what they can do

Unique resources, capabilities, and competencies(required for sustainable competitive advantage)

The Context of Internal Analysis

• Global Economy– Traditional sources of advantages can be overcome by

competitors’ international strategies and by the flow of resources throughout the global economy.

• Global Mind-Set– The ability to study an internal environment in ways that

are not dependent on the assumptions of a single country, culture, or context.

• Analysis Outcome– Understanding how to leverage the firm’s bundle of

heterogeneous resources and capabilities.

Creating Competitive Advantage

• Core competencies, in combination with product-market positions, are the firm’s most important sources of competitive advantage.

• Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies.

Competitive Advantage

• Firms achieve strategic competitiveness and earn above-average returns when their core competencies are effectively:– Acquired.– Bundled.– Leveraged.

• Over time, the benefits of any value-creating strategy can be duplicated by competitors.

Competitive Advantage (cont’d)

• Sustainability of a competitive advantage is a function of:– The rate of core competence obsolescence due to

environmental changes.

– The availability of substitutes for the core competence.

– The difficulty competitors have in duplicating or imitating the core competence.

3–111

The Challenge of Internal Analysis

• Strategic decisions in terms of the firm’s resources, capabilities, and core competencies:– Are non-routine.

– Have ethical implications.

– Significantly influence the firm’s ability to earn above-average returns.

3–112

The Challenge of Internal Analysis (cont’d)

• To develop and use core competencies, managers must have:– Courage

– Self-confidence

– Integrity

– The capacity to deal with uncertainty and complexity

– A willingness to hold people (and themselves) accountable for their work

Components of Internal Analysis Leading to Competitive Advantage and Strategic Competitiveness

Resources

• Resources– Are a firm’s assets, including people and the value

of its brand name.– Represent inputs into a firm’s production process,

such as:• Capital equipment• Skills of employees• Brand names• Financial resources• Talented managers

• Types of Resources– Tangible resources• Financial resources• Physical resources• Technological resources• Organizational resources

– Intangible resources• Human resources• Innovation resources• Reputation resources

Resources, Capabilities and Core Competencies

• Capabilities– Represent the capacity to deploy

resources that have been purposely integrated to achieve a desired end state

– Emerge over time through complex interactions among tangible and intangible resources

– Often are based on developing, carrying and exchanging information and knowledge through the firm’s human capital

Discovering CoreCompetencies

Resources• Tangible• Intangible

Capabilities

CoreCompetencies


• Capabilities (cont’d)– The foundation of many

capabilities lies in:• The unique skills and

knowledge of a firm’s employees

• The functional expertise of those employees

– Capabilities are often developed in specific functional areas or as part of a functional area.



Capabilities

CoreCompetencies

Examples of Firms’ Capabilities

Functional Areas CapabilitiesDistribution Effective use of logistics management techniquesHuman resources Motivating, empowering, and retaining employeesManagement Effective and efficient control of inventories throughinformation systems point-of-purchase data collection methodsMarketing Effective promotion of brand-name products

Effective customer serviceInnovative merchandising

Management Ability to envision the future of clothingEffective organizational structure

Manufacturing Design and production skills yielding reliable productsProduct and design qualityMiniaturization of components and products

Research & Innovative technologydevelopment Development of sophisticated elevator control solutions

Rapid transformation of technology into new products and processesDigital technology


• Four criteria for determining strategic capabilities:– Value

– Rarity

– Costly-to-imitate

– Non substitutability



Capabilities

CoreCompetencies


• Core Competencies– Resources and capabilities that

are the sources of a firm’s competitive advantage:• Distinguish a company

competitively and reflect its personality.

• Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities.



Capabilities

CoreCompetencies


• Core Competencies– Activities that a firm performs

especially well compared to competitors.

– Activities through which the firm adds unique value to its goods or services over a long period of time.



Capabilities

CoreCompetencies

Building Core Competencies• Four Criteria of

Sustainable Competitive Advantage– Valuable capabilities

– Rare capabilities

– Costly to imitate

– Non substitutable


• Valuable• Rare• Costly to imitate• Nonsubstitutable

Four Criteria of Sustainable Advantages

TABLE 3.4 The Four Criteria of Sustainable Competitive Advantage

Valuable Capabilities • Help a firm neutralize threats or exploit opportunities

Rare Capabilities • Are not possessed by many others

Costly-to-Imitate Capabilities • Historical: A unique and a valuable organizational culture or brand name

• Ambiguous cause: The causes and uses of a competence are unclear

• Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers

Nonsubstitutable Capabilities • No strategic equivalent

Building Sustainable Competitive Advantage• Valuable capabilities– Help a firm neutralize

threats or exploit opportunities.

• Rare capabilities– Are not possessed by

many others.




Building Sustainable Competitive Advantage• Costly-to-Imitate Capabilities

– Historical• A unique and a valuable

organizational culture or brand name

– Ambiguous cause• The causes and uses of a

competence are unclear

– Social complexity• Interpersonal relationships,

trust, and friendship among managers, suppliers, and customers


• Valuable• Rare• Costly to Imitate• Nonsubstitutable


Building Sustainable Competitive Advantage• Nonsubstitutable

Capabilities– No strategic equivalent• Firm-specific knowledge

• Organizational culture

• Superior execution of the chosen business model




Resource Based View (RBV)

Approach to Competitive Advantage

Internal resources are more important than external factors

Tangible Resources

Financial Resources • The firm’s borrowing capacity• The firm’s ability to generate internal funds

Organizational Resources • The firm’s formal reporting structure and its formal planning, controlling, and coordinating systems

Physical Resources • Sophistication and location of a firm’s plant and equipment• Access to raw materials

Technological Resources • Stock of technology, such as patents, trademarks, copyrights, and trade secrets

Intangible Resources

Human Resources • Knowledge• Trust• Managerial capabilities• Organizational routines

Innovation Resources • Ideas• Scientific capabilities• Capacity to innovate

Reputational Resources • Reputation with customers• Brand name• Perceptions of product quality, durability, and reliability• Reputation with suppliers• For efficient, effective, supportive, and mutually beneficial interactions and relationships

129


Module – 3

Internal Assessment (2 of 2)


Three All Encompassing Categories

1. Physical resources

2. Human resources

3. Organizational resources


Empirical Indicators

Rare

Hard to imitate

Not easily substitutable

Management

Planning

Stage When Most ImportantFunction

Strategy Formulation

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing

Controlling

Strategy Implementation

Strategy Evaluation

Managerial Questions Checklist• Does the firm use strategic-management concepts?• Are company objectives and goals measurable and well

communicated?• Do managers at all hierarchical levels plan effectively?• Do managers delegate authority well?• Is the organization’s structure appropriate?• Are job descriptions and specifications clear?• Is employee morale high?• Are employee turnover and absenteeism low?• Are organizational reward and control mechanisms effective?

Marketing

Customer Needs/Wants for Products/Services

1. Defining

2. Anticipating

3. Creating

4. Fulfilling

Marketing

Marketing Functions

1. Customer analysis

2. Selling products/services

3. Product & service planning

4. Pricing

5. Distribution

6. Marketing research

7. Opportunity analysis

Marketing Audit Checklist• Are markets segmented effectively?• Is the organization positioned well among competitors?• Has the firm’s market share been increasing?• Are present channels of distribution reliable and cost-effective?• Does the firm have an effective sales organization?• Does the firm conduct market research?• Are product quality and customer service good?• Are the firm’s products and services priced appropriately?• Does the firm have an effective promotion, advertising, and publicity

strategy?• Are marketing planning and budgeting effective?• Do the firm’s marketing managers have adequate experience and

training?

Finance/Accounting

Finance/Accounting Functions

1. Investment decision (Capital budgeting)

2. Financing decision

3. Dividend decision

4. Financial analysis – Key financial ratios

Accounting Audit Checklist• Where is the firm financially strong and weak as

indicated by financial ratio analysis?• Can the firm raise needed short-term capital?• Can the firm raise needed long-term capital through

debt and/or equity?• Does the firm have sufficient working capital?• Are capital budgeting procedures effective?• Are dividend payout policies reasonable?• Does the firm have good relations with its investors and

stockholders?• Are the firm’s financial managers experienced and well

trained?

Accounting Ratios• Liquidity ratios measure a firm’s ability to meet maturing short-term

obligations.– Current ratio– Quick (acid-test) ratio

• Leverage ratios measure the extent to which a firm has been financed by debt.– Debt-to-total-assets ratio– Debt-to-equity ratio– Long-term debt-to-equity ratio– Times-interest-earned (coverage) ratio

• Activity ratios measure how effectively a firm is using its resources.– Inventory turnover – Fixed assets turnover– Total assets turnover– Accounts receivable turnover– Average collection period

• Profitability ratios measure management’s overall effectiveness as shown by returns generated on sales and investment.

– Gross profit margin– Operating profit margin– Net profit margin– Return on total assets– Return on stockholders’ equity– Earnings per share– Price-earnings ratio

• Growth ratios measure the firm’s ability to maintain its economic position in the growth of the economy and industry.

– Sales– Net income– Earnings per share– Dividends per share

• How has each ratio changed over time?

• 2. How does each ratio compare to industry norms?

• 3. How does each ratio compare with key competitors?

• BNI

http://finance.yahoo.com/q?s=BNI

Production/Operations

Production/Operations Functions

Process

Capacity

Inventory

Workforce

Quality

Production/Operations Audit Checklist• Are suppliers of raw materials, parts, and

subassemblies reliable and reasonable?• Are facilities, equipment, machinery, and offices in

good condition?• Are inventory-control policies and procedures

effective?• Are quality-control policies and procedures effective?• Are facilities, resources, and markets strategically

located?• Does the firm have technological competencies?

Research & Development

Research & Development Functions

Development of new products before competitors

Improving product quality

Improving manufacturing processes to reduce costs

R&D Audit Checklist of Questions• Does the firm have R&D facilities? Are they adequate?• If outside R&D firms are used, are they cost effective?• Are the organization’s R&D personnel well qualified?• Are R&D resources allocated effectively?• Are management information and computer systems

adequate?• Is communication between R&D and other organizational

units effective?• Are present products technologically competitive?

Management Information Systems

• Information Systems• CIO/CTO• Security• User-friendly• E-commerce

Information Systems Audit Checklist• Do all managers in the firm use the information system to make decisions?• Is there a chief information officer or director of information systems

position in the firm?• Are data in the information system updated regularly?• Do managers from all functional areas of the firm contribute input to the

information system?• Are there effective passwords for entry into the firm’s information system?• Are strategists of the firm familiar with the information systems of rival

firms?• Is the information system user friendly?• Do all users of the information system understand the competitive

advantages that information can provide firms?• Are computer training workshops provided for users of the information

system?• Is the firm’s information system continually being improved in content and

user-friendliness?

Integrating Strategy & Culture

Pattern of behavior developed by an organization as it learns to cope with its problem of external adaptation and internal integration…is considered valid and taught to new members

Organizational Culture

CulturalProducts

Values

Legends Beliefs

Heroes Rites

Symbols RitualsMyths

Integrating Strategy & Culture

Outcomes from Combinations of the Four Criteria

Valuable?

Rare?Costl

y to Im

itate?

Nonsubsti

tutable?

CompetitiveConsequences

PerformanceImplications

NoNo NoNo NoNo NoNo CompetitiveDisadvantageCompetitiveDisadvantage

Below AverageReturnsBelow AverageReturns

YesYes NoNo NoNo Yes/NoYes/No

CompetitiveParityCompetitiveParity

Average ReturnsAverage Returns

YesYes YesYes NoNo Yes/NoYes/No

Temporary Com-petitive AdvantageTemporary Com-petitive Advantage

Above Average to Average ReturnsAbove Average to Average Returns

YesYes YesYes YesYes YesYes Sustainable Com-petitive AdvantageSustainable Com-petitive Advantage

Above AverageReturnsAbove AverageReturns

Outcomes from Combinations of the Criteria for sustainable Competitive Advantage

Creating Value

• By exploiting their core competencies or competitive advantages, firms create value.

• Value is measured by:– Product performance characteristics

– Product attributes for which customers are willing to pay

• Firms create value by innovatively bundling and leveraging their resources and capabilities.

• Superior value Above-average returns

Value Chain Analysis

• Allows the firm to understand the parts of its operations that create value and those that do not.

• A template that firms use to:– Understand their cost position.

– Identify multiple means that might be used to facilitate implementation of a chosen business-level strategy.

Value Chain Analysis (cont’d)

• Primary activities involved with: – A product’s physical creation

– A product’s sale and distribution to buyers

– The product’s service after the sale

• Support Activities– Provide the assistance necessary for the primary

activities to take place.

Value Chain Analysis (cont’d)

• Value Chain– Shows how a product moves from the raw-

material stage to the final customer.

• To be a source of competitive advantage, a resource or capability must allow the firm:– To perform an activity in a manner that is superior

to the way competitors perform it, or

– To perform a value-creating activity that competitors cannot complete

The Basic Value Chain

Examining the Value-Creating Potential of Primary Activities

Inbound LogisticsActivities, such as materials handling, warehousing, and inventory control, used to receive, store, and disseminate inputs to a product.

OperationsActivities necessary to convert the inputs provided by inbound logistics into final product form. Machining, packaging, assembly, and equipment maintenance are examples of operations activities.

Outbound LogisticsActivities involved with collecting, storing, and physically distributing the final product to customers. Examples of these activities include finished goods warehousing, materials handling, and order processing.

Marketing and SalesActivities completed to provide means through which customers can purchase products and to induce them to do so. To effectively market and sell products, firms develop advertising and promotional campaigns, select appropriate distribution channels, and select, develop, and support their sales force.

ServiceActivities designed to enhance or maintain a product’s value. Firms engage in a range of service-related activities, including installation, repair, training, and adjustment.Each activity should be examined relative to competitors’ abilities. Accordingly, firms rate each activity as superior, equivalent, or inferior.

Examining the Value-Creating Potential of Support Activities

ProcurementActivities completed to purchase the inputs needed to produce a firm’s products. Purchased inputs include items fully consumed during the manufacture of products (e.g., raw materials and supplies, as well as fixed assets—machinery, laboratory equipment, office equipment, and buildings).

Technological DevelopmentActivities completed to improve a firm’s product and the processes used to manufacture it. Technological development takes many forms, such as process equipment, basic research and product design, and servicing procedures.

Human Resource ManagementActivities involved with recruiting, hiring, training, developing, and compensating all personnel.

Firm InfrastructureFirm infrastructure includes activities such as general management, planning, finance, accounting, legal support, and governmental relations that are required to support the work of the entire value chain. Through its infrastructure, the firm strives to effectively and consistently identify external opportunities and threats, identify resources and capabilities, and support core competencies.

Each activity should be examined relative to competitors’ abilities. Accordingly, firms rate each activity as superior, equivalent, or inferior.

The Value-Creating Potential of Primary Activities

• Inbound Logistics– Activities used to receive, store, and disseminate

inputs to a product• Operations– Activities necessary to convert the inputs provided

by inbound logistics into final product form• Outbound Logistics– Activities involved with collecting, storing, and

physically distributing the product to customers

The Value-Creating Potential of Primary Activities (cont’d)

• Marketing and Sales– Activities completed to provide the means

through which customers can purchase products and to induce them to do so.

• Service– Activities designed to enhance or maintain a

product’s value• Each activity should be examined relative to competitor’s

abilities and rated as superior, equivalent or inferior.

The Value-Creating Potential of Primary Activities: Support

• Procurement– Activities completed to purchase the inputs

needed to produce a firm’s products.• Technological Development– Activities completed to improve a firm’s product

and the processes used to manufacture it.• Human Resource Management– Activities involved with recruiting, hiring, training,

developing, and compensating all personnel.

The Value-Creating Potential of Primary Activities: Support (cont’d)

• Firm Infrastructure– Activities that support the work of the entire value

chain (general management, planning, finance, accounting, legal, government relations, etc.)• Effectively and consistently identify external opportunities

and threats• Identify resources and capabilities• Support core competencies

– Each activity should be examined relative to competitor’s abilities and rated as superior, equivalent or inferior.

Figure 3.4

Prominent Applications of the Internet in

the Value Chain

Source: Reprinted by permission of Harvard Business Review from “Strategy and the Internet” by Michael E. Porter, March 2001, p. 75. Copyright © 2001 by the Harvard Business School Publishing Corporation; all rights reserved.

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Module – 4

Balanced Scorecard, Long term objectives, types of strategies

(1 of 3)

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M4 - Balanced Scorecard, Long term objectives, types of strategies

4.1 Balanced Scorecard4.2 Long term objectives – formulating long term and

grand strategic options4.3 Generic Competitive Strategies and Situation

Suitability4.4 Defensive Strategies4.5 Innovation, Integration and diversification4.6 Tailoring Strategy4.7 Strategic Mgt for NGO’s & SME’s

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Module – 4


(2 of 3)

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Module – 4


(3 of 3)

170


Module – 5

Strategic Analysis and Choices (1 of 2)

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M5 - Strategic Analysis and Choices

5.1 Strategy Formulation framework5.2 BCG and Ansoff Matrix5.3 Product Portfolio Analysis5.4 Value Curves5.5 IE Matrix5.6 Grand Strategy matrix5.7 QSPM – Quantitative Strategic Planning Matrix

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Module – 5

Strategic Analysis and Choices (2 of 2)

173


Module – 6

Strategy Implementation(1 of 2)

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M6 – Strategy Implementation

6.1 Annual Objectives6.2 Developing Functional Strategies6.3 Developing and Communicating Concise policies6.4 Resource Allocation6.5 Managing Conflict6.6 Matching Structure with Strategy6.7 Managing Resistance to Change6.8 Issues in Strategy Implementation, Strategy evaluation

and Contingency Planning6.9 Auditing

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Module – 6

Strategy Implementation(2 of 2)

176

Best of

Luck

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M5 : 5.4 Strategic LeadershipStrategic Leadership is a persons ability to anticipate, envision, maintain flexibility, think strategically and work with others to initiate changes that will create a viable future for the organization. Org success is not a chance occurrence but determined primarily by the decisions strategic leaders make. It is a process of providing direction and inspiration necessary to create and implement a vision, a mission and strategies to achieve and sustain orgznl objectives. Top, middle and lower levels of orgzn are involved in strategic leadership but top mgt is held responsible for current performance as well as for creating conditions that will insure the orgzns survival in the future.

Complexity of environment and uncertainty of the future make the task of the strategic leader more difficult. They perform 4 primary responsibilities :-1. Conceptualize the organizations vision, mission and core values2. Oversee the formulation of objectives, strategies, policies and structures that

translate vision, mission and core values into business decisions3. Create an environment and culture for organizational learning and mutual

exchange between individuals and groups4. Serve as steward and role model for the rest

Strategic leadership ensures that the strategic management process is successfully carried out and yields desired results for the organization.

Forces Influencing Design of Strategic Management SystemsForces Influencing Design of Strategic Management Systems

Toward more formality and more details

Toward less formality and fewer details

Management StylesPolicy makerDemocratic-permissiveAuthoritarianDay-to-day operational thinkerIntuitive thinkerExperienced in planningInexperienced in planning

OrganizationSmall one-plant companiesLarge companies


Forces Influencing Design of Strategic Management Systems (Cont’d)Forces Influencing Design of Strategic Management Systems (Cont’d)


Toward less formality and fewer detailsComplexity of

Environment

Stable environmentTurbulent environmentLittle competitionMany markets and customersSingle market and customerCompetition severe



Toward less formality and fewer details

Complexity of Production Process

Long production lead timesShort production lead timesCapital intensiveLabor intensiveIntegrated manufacturing processesSimple manufacturing processesHigh technologyLow technologyMarket reaction time for newproduct is shortMarket reaction time is long




Toward less formality and fewer detailsNature of Problems

Facing new, complex, tough problems having long-range aspects

Facing tough short-range problems

Purpose of Planning System

Coordinate division activities

Train managers



Strategic Management - V2

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