Strategic Mgt 3rd Sem Mms2

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STRATEGIC MANAGEMENT-AN INTRODUCTION

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complete strategic notes

Transcript of Strategic Mgt 3rd Sem Mms2

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STRATEGIC MANAGEMENT-AN INTRODUCTION

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COMPETITIVE ADVANTAGE

Is attained when a firm generates supernormal returns on its investments, by offering services of value, and using a cost effective technological base.

Is sustained when the firm appropriately exploits and develops its technological base, thereby avoiding erosion of its competitive position from competitive attacks and changes in the market preferences.

Business policy – set of management decisions oriented towards enhancing and sustaining the firm’s competitive advantage based on a system of extrinsic and intrinsic values.

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BUSINESS STRATEGY

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STRATEGIC MANAGEMENT

Process of planning, programming, performing, profiting from and developing business policy.

Strategy refers to the pursuit of competitive advantage i.e., winning in the marketplace.

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DIFFERENT PERSPECTIVES

Organization as a battleship As a bundle of market activities As a bundle of resources As a pattern in a stream of decisions As a contingent systems. As a portfolio of platforms As an exchange hub. As a managerial function. As a dealer in value.

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STRATEGIC INTENT

POPULARIZED BY Gary Hamel and C.K.Prahalad (1989).

Refers to the purpose of the organization and the ends it wishes to pursue.

Represents the organization’s belief about its state of the future.

The ends the organization wishes to pursue vary from being long term (vision and mission), to being narrow with a focus on the short term (objectives or goals)

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Strategic intent

Strategic intent must inform all of organisational life

Strategic intent must take account of the realities of the organisation and its environment

Strategic intent is more important than ‘strategy’.

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(Miller 1998)

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VISION

Refers to the broad category of long-term intentions that the organization wishes to pursue.

At General Electric (GE) the corporate vision is 'We bring good things to life'.

The Ford Motor Company vision is 'to become the world's leading consumer company for automotive products and services'.

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On a lighter note…..

"Business Partners"A man is flying in a hot air balloon and realizes he is lost. He reduces height and spots a man down below. He lowers the balloon further and shouts, "Excuse me, can you tell me where I am?" The man below says: "Yes. You're in a hot air balloon, hovering 30 feet above this field." "You must work in Information Technology" says the balloonist. "I do" replies the man. "How did you know?" "Well" says the balloonist, "Everything you have told me is technically correct, but it's no use to anyone." The man below says, "You must work in business." "I do" replies the balloonist, "but how did you know?" "Well," says the man, "You don't know where you are, or where you're going, but you expect me to be able to help. You're in the same position you were before we met, but now it's my fault."

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Three Legged Chicken" A man was driving along a freeway when he noticed a chicken running along

side his car. He was amazed to see the chicken keeping up with him because he was doing 50 MPH. He accelerated to 60 and the chicken stayed right next to him. He speeded up to 75 MPH and the chicken passed him up. The man noticed the chicken had three legs. So, he followed to chicken down a road and ended up at a farm. He got out of his car and saw that all the chickens had three legs.

He asked the farmer "What's up with these chickens?" The farmer said "Well, everybody likes chicken legs. I bred a three legged bird.

I'm going to be a millionaire." The man asked him how they tasted. The farmer said "Don't know, haven't caught one yet.

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MISSION

the mission statement makes the vision statement more tangible and comprehensible.

A mission statement clearly specifies why an organization exists, what differentiates the organization from others and the basic beliefs, values, and philosophy of the organization.

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CORE VALUES

Represent commonly held beliefs, mindsets, and assumptions that shape how work is done in an organization.

Are derived out of the organization’s mission statement and aid in differentiating the organization from others.

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GOALS

Provide the basis for action towards the achievement of the organization’s mission, in the form of specific milestones.

Goals are both financial and non financial. Stretch goals- make the organization in order

to achieve them.

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OBJECTIVES

Are operational definitions of the organization’s goals.

Provide the measurable parameters for evaluating the performance of the organization.

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PLANS

Indicate the specific actions that will be taken by the organization in order to achieve the objectives.

Specify the roles members of the organization will perform, the resource allocation across different organizational sub units and departments, and prioritize and schedule the various activities.

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DETERMINATION OF A FIRM’S STRATEGIC INTENT

What business we are in? What do we want to be known for/as in

future? In what way will the organization serve the

interests of the various stakeholders? How does the organization define its various

scopes of businesses? How broad, aggressive, and powerful will the

organization’s intent be defined?

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LIMITATIONS OF STRATEGIC INTENT

Dorothy Leonard- Burton (1995) has highlighted how pursuit of firm’s strategic intent can create core rigidities that blind the firms to opportunities/threats in the business environment.

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STRATEGY DIAMOND

Hambrick and Frederickson (2001) specify the architecture of strategy in the form of a strategy diamond.

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Where will we be active?

How will we get there?

How will we win?

What will be our speedAnd sequence of moves?

How will we obtain our results?

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Strategic Dissonance

The Indian pharmaceutical industry is characterized by impending change in patent regimes from product patents to process patents. The process patent regime forced firms to build distinctive competencies in process chemistry and reverse engineering of products whose patents had expired in the international market. As the country readies itself for product patents, firms have to build new capabilities,viz., basic research, and an integrated process of new drug discovery. The time taken for a molecule from discovery to approval and commercialization (five to seven years), and the large amounts of money required for new molecular discovery, it is imperative that companies invest heavily in building these competencies. These situations that signal changes in the business environment, shifting the basis of competition among firms and redefine the way business is done in an industry , are called STRATEGIC INFLECTION POINTS. (GROVE, 1996)

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Business Level Strategy

How can we best compete in the industry we are in? The goal is to improve the effectiveness of various functions

within an organization to enable it to obtain competitive advantage.

Miles and Snow (1978) have developed a typology that categorized firms’ strategic positions into the following categories: prospectors, defenders, reactors and analyzers.

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Porter’s Classification

The three generic strategies are:

Cost leadership

Differentiation

Focus

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Stuck in the Middle

Firms that do not have a clear positioning and which make choices that include a few elements of different strategies. Such firms do not develop successful competitive advantage.

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Hybrid strategies

Miller and Dees, 1993 suggest that hybrid strategies are also useful.

Include combinations of generic strategies, such as simultaneous low cost and differentiation strategy.

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Business Level Strategy and the Industry Life CycleDiagram

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Strategy in emerging industries The pioneer needs to be able to make its design the dominant design in

the industry. This is important in industries where there is a technical standard that firms converge towards.

Protect the product from imitation. (with patents, innovations)

Balance the firms self-interest with actions that benefit the whole industry.

Careful understanding of the industry and its evolution as customer needs will change as they use the product, and firms need to be vigilant and be able to change as customer needs change and technology evolves.

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Strategy in Growth Industries The effort is to make a new product or

service widely used. The technology adoption life cycle model

describes the attributes of various customer groups that adopt a product. (Moore, 2000)

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Strategy in Mature Industries Baden- Fuller and Stopford (1992) studied cases of innovation in mature businesses. Firms need to focus on reconciling alternatives- high

quality at low cost, variety at low cost. Price cutting can be used to deter entrants. Product proliferation to close all niches.

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Strategies in declining industries Divest quickly Leadership Niche Harvests

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THE ART OF WAR

The Art of War is a Chinese military treatise that was written during the 6th century BC by Sun Tzu. Composed of 13 chapters, each of which is devoted to one aspect of warfare, it has long been praised as the definitive work on military strategies and tactics of its time.

Laying Plans Waging War Attack by Stratagem Tactical Dispositions Energy Weak Points and Strong Manoeuvring Variation of Tactics The Army on the March Terrain The Nine Situations The Attack by Fire The Use of Spies

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CONTENT

Laying Plans OCS explores the five key elements that define competitive position (mission, climate, ground, leadership, and methods) and how to evaluate your competitive strengths against your competition.

Waging War explains how to understand the economic nature of competition and how success requires making the winning play, which in turn, requires limiting the cost of competition and conflict.

Attack by Stratagem defines the source of strength as unity, not size, and the five ingredients that you need to succeed in any competitive situation.

Tactical Dispositions explains the importance of defending existing positions until you can advance them and how you must recognize opportunities, not try to create them.

Energy explains the use of creativity and timing in building your competitive momentum. Weak Points & Strong explains how your opportunities come from the openings in the

environment caused by the relative weakness of your competitors in a given area

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QUOTES

So it is said that if you know your enemies and know yourself, you will fight without danger in battles.If you only know yourself, but not your opponent, you may win or may lose.If you know neither yourself nor your enemy, you will always endanger yourself.

Therefore one hundred victories in one hundred battles is not the most skillful. Seizing the enemy without fighting is the most skillful.

All warfare is based on deception.

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…CONTD

Maneuvering explains the dangers of direct conflict and how to win those confrontations when they are forced upon you.

Variation in Tactics focuses on the need for flexibility in your responses. It explains how to respond to shifting circumstances successfully.

The Army on the March describes the different situations in which you find yourselves as you move into new competitive arenas and how to respond to them. Much of it focuses on evaluating the intentions of others.

Terrain looks at the three general areas of resistance (distance, dangers, and barriers) and the six types of ground positions that arise from them. Each of these six field positions offer certain advantages and disadvantages.

The Nine Situations describe nine common situations (or stages) in a competitive campaign, from scattering to deadly, and the specific focus you need to successfully navigate each of them.

The Attack by Fire explains the use of weapons generally and the use of the environment as a weapon specifically. It examines the five targets for attack, the five types of environmental attack, and the appropriate responses to such attack.

The Use of Spies focuses on the importance of developing good information sources, specifically the five types of sources and how to manage them.

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Changes in strategic intent of the firm requires shift in business strategy. Hence shift in diverse functional strategies is required.

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Strategy and HRM

Ji Li (2003) studied the relationship between the HR strategies and the business strategies, using a sample of beverage and electronic multinational corporations in China. The study revealed that the firms with a cost leadership strategy tend to use short-term and temporary employment and less educated workforce, offer less monetary compensation to the employees, and rely more on the managers and supervisors for making major decisions and disciplining employees. These firms allow higher turnover among their employees, and have lower productivity norms for the workforce. The employees are acquired and dismissed in response to the short term needs of the firm.

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The firms with differentiation strategy tend to use long-term and continuing employment and more educated workers, give more monetary compensation to the employees and involve workers in making major decisions.

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Strategic Intent & HR

Strategic intent allows the firms to choose appropriate HR practices, even though they make not appear to be consistent with the business level strategy on the surface.

The firms may adopt certain HR practices identified as the best practices whether or not they are consistent with their specific business strategy. The high commitment HR practices are commonly referred to as the high performance HR practices, because they reflect the best practices adopted by the world’s most successful and prestigious organizations.

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The supply chain strategy

The cost leadership strategy is usually associated with “efficient” supply chain strategy, and differentiation strategy with a “responsive” supply chain strategy.

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The retail market in India is becoming more organized. The new retailers are striving for a differentiated strategy to take away a significant share of market away from kirana stores. Initially, most sought to locate in premium shopping malls, and project a modern image; however, that has not been sufficient to justify their high prices in a nation where the consumers are very value conscious.

Now Retailers get supplies directly from the corporate producers, and sell a good percentage through the retail shops.

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Strategic Intent and SCM

In the industrialized nations intent is more focused on the demand management capabilities, and hence firms tend to give a stronger emphasis to responsive supply chain strategies. Competitive advantage is gained by the firms who are able to adeptly integrate efficiency with responsiveness.

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METHODS FUNCTION-THE R&D STRATEGY

Methods function includes defining and developing technological capabilities and investments, exploiting technology learning, transfer, and synergies (both intra organizational and extra organizational), enabling appropriate vehicles and phasing for technological growth. The R&D strategy encompasses methods function in different parts of the firms value chain system going beyond the firms boundaries.

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MONEY FUNCTION-THE FINANCE AND ACCOUNTING STRATEGY

Money function is concerned with the planning, generation, utilization, and control of financial and valuable non-financial resources of the firm. Finance and accounting strategy deals with the consistency in procedures and systems for capital structure and capital expenditure, liquidity levels, modes of raising capital, working capital, and levels of profit distribution and retention.

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Case Example

In 2003, American Express and IMA India surveyed changing role of Chief Financial Officer (CFO) in India. Over a six-year period since 1997, when the survey was first conducted, the role of the CFO has been transformed “from one relating to pure finance to that of leadership, and strategic decision making.” in 1997, 85% of the CFOs spent most of their time on transaction processing and control; now that is down to 45%. The time spent on strategy has increased from 36% in 1997 to 48% in 2003, mostly because of a greater emphasis on strategic planning. This shift is indicative of a growing attempt by the Indian companies to become more differentiated, and to rely less on their low labor cost advantages ( Jayaram, 2003)

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MANUFACTURING FUNCTION- THE OPERATIONS STRATEGY

Manufacturing function comprises production planning and control, production system design, capacity management, and quality management. OS seeks a fit with the business by striving for consistency between its capabilities and the business’s competitive advantage.

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Case example

The Bangalore based Fibers and Fabric International is going against cost- conscious manufacturing, and creating a differentiated niche by pioneering flexible manufacturing system in fashion garments. For this, it is not just buying technology, but also augmenting its capabilities for using technology. It uses imported high tech machines, has hired an Italian technician to help accelerate lead times, and is planning to set up a Rs. 60 million state-of-the-art water recycling plant for bagging eco-friendly buyers from the Netherlands, and Germany. In 2003, it commanded an average price of 14.43 euros on its sales of 2 million fashion denim jeans- more than double the 7 euros commanded by the Chinese manufacturers. It also successfully entered the high-fashion jeans market, again commanding a premium on jeans retailing at 200 euros and above. Since in these markets, inventory holding costs are high, most European retailers prefer to deal with suppliers who can replenish stocks in short lead times; its flexible manufacturing system allows a lead time of just two weeks- unheard of in China ( Surendar and Rajshekhar, 2004)

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THE INFORMATION SYSTEMS STRATEGY

Is concerned with defining strategic applications of intelligent machines, analyzing the information needs, designing machine enabled programming, and integrating the relevant system of programming to meet the specific focused needs.

IS strategy may be classified as either smart or dumb.

Dumb IS strategy is geared towards using knowledge stocks.

The smart IS strategy is geared towards fostering knowledge flows through ongoing , intimate, and interactive relations among various sources of knowledge stocks.

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The Customer Relations Strategy The customer relations strategy focuses on furthering

competitive advantage by building relationships with customers, partners, and channel members; offering appropriate products; and the deployment of sufficient resources to realize the choice of relationships and offerings.

The strategy can be either pull-oriented (Kohli and Jaworski,1990) or push oriented (Narver and Slater, 1990)

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Strategic Intent and Marketing Strategy Research suggests that the marketing function plays a more

strategic role in a business unit with a differentiation strategy than in one with an undifferentiated cost leadership strategy. Depending on the intent of differentiation marketing strategies tend to differ.

Henry Mintzberg (1995) suggests five intents of differentiation- Positioning by price, marketing image, product design, product quality and product support.

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Motivating Function- The Leadership Strategy This function is concerned with the enabling of outstanding human performance

in others, and instilling in them a commitment and passion to peruse and pursue the strategic intent.

The leadership strategy is classified as either transactional, or transformational (Burns,1978; Bass, 1985)

Transactional leadership tends to be more effective in assuring efficiency and control critical to the cost leadership strategy.

Transformational leadership tends to be more effective for firms following a differentiation strategy.

Strategic intent for supernormal accomplishments enables the leaders and their teams to stand in the future and look back. The process whereby leaders transform themselves and the culture of their organization through a creative commitment to a radically different future is referred to as the “Merlin Factor” (Smith, 1994)

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…contd

‘Ah yes’, said Merlin, ‘how did I know to set breakfast for two?....Now ordinary people are born forwards in time, if you understand what I mean, and nearly everything in the world goes forward too. This makes it quite easy for ordinary people to live…but unfortunately, I was born at the wrong end of time and I have to live backwards from in front while living forward from behind…’ (White, 1958)

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Manipulating Function-The Fiduciary Strategy

Manipulating function is concerned with the assurance of legitimacy and accountability of the organization with its stakeholders in terms of moral, ethical and legal obligations established with them

The strategy refers to all behaviors that are enacted and are expressed in special relation of trust, confidence, or responsibility between an organization and its various stakeholders.

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…contd

Two perspectives on fiduciary strategy are: agentic and trusteeship.

Agentic perspective holds that the firms have fiduciary obligation to only their stockholders.

The trusteeship perspective derives from the stewardship theory and holds that the boundaries of this fiduciary obligation extend to other stakeholders also.

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INTERNAL ANALYSIS

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Analysis of the business and functional strategies should be Complemented by a rigorous analysis of the firms’ resources, Capabilities and competence. Internal analysis provides the basis.The purpose is to identify and capitalize on the firm’s resources, Capabilities and competencies in its quest for competitive advantage.

Competitive advantage refers to the ability of a firm to outperform its rivals, or competitors.A firm like Reliance Industries Limited derives its competitive advantage in the petrochemicals business through its scale, and the extent ofVertical integration.Firms like GE derive their competitive advantage through their global operations, quality management systems and superior products and services.

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Company resources & capabilities

Strategic assets: distinctiveAnd core competencies

Sustained marketperformance

Competitive Advantage

Development of a Firm’s Competitive Advantage

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SWOT ANALYSIS

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Identifying a Company’s Resource Strengths

Physical assets Human assets Organizational assets Intangible assets A skill or expertise Alliances or such contracts that provide the firm

with enhanced competitive position in the market like licenses from the government, and preferential access to specific raw material.

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Identifying a Company’s Resource Deficiencies Lack of physical, human, organizational, or

intangible assets that are critical for survival. Lack of appropriate skills or expertise in leveraging

the resources in competing with other firms. Lack of strategic direction for the company to

understand and fulfill the needs of specific customer segments.

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Identifying a Company’s Market Opportunities Emergence of new customer segments in the market/opening up

of new markets for the company. Changes in the customer habits and preferences, and their

buying behavior. Changes in the technological, regulatory, social, or economic

environment of the industry that either have an impact on the product-market scope of the firm, or help it cut costs and improve productivity, and enhance quality.

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Identifying a Company’s Environmental Threats Emergence of new customer segments in the market/opening up

of new markets. Changes in the customer habits and preferences, and their

buying behavior. Changes in the technological, regulatory, social, or economic

environment of the industry that have an impact on the product-market scope of the firm.

Entry of new competitors with new business models.

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RESOURCES

CAPABILITIES

CORE COMPETENCE

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Organisational Resources + Organisational Behaviour

Strength and Weaknesses

Synergistic Effects

Competencies

Organisational Capability

Strategic Advantage

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PRODUCT

1

PRODUCT

2

PRODUCT

3

PRODUCT

4

PRODUCT

5

PRODUCT

6

PRODUCT

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PRODUCT

8

BUSINESS 1 BUSINESS 2 BUSINESS 3 BUSINESS 4

CORE PRODUCT 1

CORE PRODUCT 2

COMPETENCE 1 COMPETENCE 2

CORE COMPETENCE

Development of Products Using Core Competence

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CASE EXAMPLE

An example of building core competencies is that of Chennai-based entrepreneurial firm, CavinKare. With extensive reliance of customer research, branding, and clever positioning, CavinKare has flooded the market with hair care, skin care, and personal care products, creating strong brands like Fairever, Chik, Spinz, and Meera. The company has also been very successful in the use of sachets to sell low unit volume products, thereby reaching even the poorest customers. The core competence of the company is its engaging with the customer to support traditional rational market research, to identify market opportunities for branding (Ranganathan, 2004). Recently, CavinKare, leveraging on this core competence, has entered the foods business with the acquisition of the Ruchi brand of pickles. The fastest growing food segment in the market that is amenable to packaging in sachets was quickly identified by CavinKare, and the company is now planning to introduce premium pickles in sachets.

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RESOURCES

Refer to inputs into a firm’s value creation process.

Could be either tangible or intangible.

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CAPABILITIES

Refer to the capacity of the firm to deploy its resources that have been purposefully acquired.

Are a function of the firm’s resources, their application and organization, internal systems and processes, and firm-specific skill sets.

Are rarely unique, and can be acquired by other firms in that industry. When capabilities differentiate the firm from the competitors- distinctive

capabilities. Distinctive capabilities are visible to the competition, and can be

imitated with little effort.

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Core Competence

Refers to that set of distinctive capabilities that provide a firm with a sustainable source of competitive advantage.

Emerge over time and reflect the firms ability to deploy different resources and capabilities in a variety of contexts to gain and sustain competitive advantage.

Collective learning and coordination skills behind firm’s product lines (Prahalad and Hamel, 1990)

Are a source of competitive advantage and enable a firm to introduce an array of products and services in the market.

Also lead to the development of new products. The matching of market opportunities with a firm’s core

competencies forms the basis for launching new products, or entering new markets.

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A good example of how core competencies could become core rigidities is the Indian watch maker-HMT.

The core competence of HMT had clearly blinded it from accurately sensing the changes in the industry environment, and therefore HMT lost its leadership position and market share.

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Resource Based View (RBV) Of A Firm

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The balancing factor of external and internal environment is key to success of business strategy.

An organisation uses different types of resources and exhibits a certain type of behaviour:

Organisational AppraisalOrganisational Appraisal

WHAT ARE ORGANISATIONAL RESOURCESWHAT ARE ORGANISATIONAL RESOURCES

The theory of strategy is developed by BARNEYBARNEY (1991): ‘A firm is a bundle of resources’

The theory of strategy is developed by BARNEYBARNEY (1991): ‘A firm is a bundle of resources’

1.Tangible.2. Intangible.

This include all assets, capabilities, organisational processes, information and knowledge.

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The perspective of identifying and analyzing firm level resources that contribute to competitive success is known as the RBV of the firm (Barney, 1991)

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Assessment of Valuable Resources The scarcity test. The mobility test. The inimitability test. The Durability test. The appropriability test The substitutability and superiority of

resources test.

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KEY SUCCESS FACTORS(ROCKHART, 1979) Structure of the industry. Competitive strategy, industry position, and

geographic location. Environmental factors. Temporal factors.

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VALUE CHAIN ANALYSIS:

ORGANISATIONAL STRATEGIC ADVANTAGEORGANISATIONAL STRATEGIC ADVANTAGE

Porter (1985) is credited with the introduction of the frame work called VALUE CHAINVALUE CHAIN.. A value chain is a set of interlinked value-creating activities performed by an organisation.

Porter divided the value chain of a manufacturing organisation into PRIMARY and SUPPORT activities.

Primary activities are directory related to the flow of the product to the customer and include:

Inbound Logistics

Warehousing

Material Handling

Inventory Mangt. & Scheduling

OperationsManufacturing

PackagingAssembly

Maintenance

Outbound logistics

WarehousingTransportation

Order ProcessingScheduling

Marketing & Sales

PricingDistributionCustomer

Relationship

ServiceAfter Sales Service

TrainingComplaints Redressal

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EXTERNAL ANALYSIS

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The two main forces that determine the performance of a firm are the industry environment the firm operates in, and the kind

Resources/skills and strategies the firm possesses/pursues.

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Industry Structure-Five Forces Model The industry structure is determined by a set

of factors. The most common tool for analyzing an

industry structure is Porters Five Forces model.

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Industry competitors

Rivalry among firms

Potentialentrants

Buyers

substitutes

suppliers

Threat of new entrants

Bargaining power Of buyers

Threat of

substitutes

Bargaining Power ofsuppliers

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PEST ANALYSIS

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Industry competitors

Rivalry among firms

Potentialentrants

Buyers

substitutes

suppliers

Threat of new entrants

Bargaining power Of buyers

Threat of

substitutes

Bargaining Power ofsuppliers

Political/legalenvironment

Economic environment

Technologicalenvironment

Social/demographicenvironment

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Competitors

& complementors Nalebuff and Brandenburger (1996) defined complementors as follows: A player is your complementor if customers value your product when

they have the players product, than when they have your product alone. A player is your complementor if it’s more attractive for a supplier to

provide resources to you when it is also supplying the other player, than when it’s supplying you alone.

Their concept of ‘Value Net’ reveals two fundamental symmetries-between customers and suppliers, and between competitors and complementors.

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company

customers

suppliers

c complementors

competitors

VALUE NET

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COMPETITIVE GAMING STRATEGY

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CONCEPT- COMPETITIVE GAMING Competitive games refer to the strategies and

counter strategies of firms that compete in a shared marketplace.

Competitive intelligence refers to the techniques for systematically discovering, monitoring, and analyzing both behaviors of competing firms and structure of the marketplaces where the firms compete.

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FRAMEWORK FOR COMPETITIVE GAMING

What is the structure of the marketplace?

How are the rules of the game shaped and enforced?

What are the potential behaviors, strategies, and payoffs of the players in the game?

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THE STRUCTURE OF THE MARKETPLACE

Emerging market structures

Growth market structures

Mature market structures

Declining market structures

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Emerging Stage Market Structures Type of market structure- Nascent competition,

hyper competitive Nature of competitive advantage- first mover

advantage, Guerilla advantage. Prototypical competitive game- race for the

dominant paradigm, continuous discovery.

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Growth Stage Market Structures Type of market structure- Niche, oligopoly

Nature of competitive advantage-Semi-sustainable advantage, Co-sustainable advantage

Prototypical competitive game- Differentiation, Mutual interdependence

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Mature Stage Market Structures Type of market structure- Dominant firm,

Monopoly Nature of competitive advantage- Generally

sustainable advantage, generally diminishing advantage.

Prototypical competitive game- Focal point, cash cow

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Declining Market Structures

Type of market structure- Fragmented, Perfect competition

Nature of competitive advantage- Windows of advantage, devoid of advantage

Prototypical competitive game- bare-bone formula, fly-by-night operators

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Rule Of The Competitive Games Time Frame

Information Content

Level Playing

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CORPORATE STRATEGY

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Corporate-Level Strategy("What business are we in?") Acquisition of new businesses Additions or divestment of business units,

plants, or product lines Joint ventures with other companies in new

areas.

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MODULE 12

STRATEGIC MANAGEMENT

“Insights and hard work deliver results”• What types of strategies are used by organizations?

• How are strategies formulated and implemented in strategic management?

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is concerned with answering two questions:

what businesses should a firm participate in so as to maximize its long-run profitability

what strategies should the firm use to enter or exit those businesses.

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TYPES OF STRATEGIES

Corporate Strategies

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Typology OF Corporate Strategy Single business companies Vertically integrated companies Dominant Business companies Related business companies Unrelated- business companies

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Single Business Firms

Most firms begin their operations as a single business. As firms grow, they seek to expand their businesses. As a firm invests in building industry specific capabilities, it seeks to secure its competitive advantage in that business

Significant risk is associated with focus on single business. this market risk can be hedged by investing in other business.

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Ways a single business firm can expand Vertical integration diversification

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Vertical and Horizontal Integration - Value Chain Activities

Vertical Integration: Coordinating upstream activities (those closer to the raw materials) with downstream activities (those closer to the customer)

Acquisitions, Strategic Alliances, Internal Development

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Different Types of Vertical RelationshipDifferent Types of Vertical Relationship

Spot sales/ purchases

Long-term contracts

Agency agreements

Franchises

Vertical integration

Joint ventures

Informal supplier/ customer

relationships

Supplier/ customer

partnerships

Low Degree of Commitment High

Low

Lo

wF

orm

aliz

atio

n H

igh

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Diversification

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Diversification is driven by the assumption that good managers would be able to manage any business irrespective of the product/service, and that multiple businesses would balance cash flows of the corporate.

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Motives for DiversificationMotives for Diversification

GROWTH --The desire to escape stagnant or declining industries a powerful motives for diversification (e.g. tobacco,

oil, newspapers). --But, growth satisfies managers not shareholders.

--Growth strategies (esp. by acquisition), tend to destroy shareholder value

RISK --Diversification reduces variance of profit flowsSPREADING --But, doesn’t create value for shareholders—they can

hold diversified portfolios of securities.--Capital Asset Pricing Model shows that diversification lowers unsystematic risk not systematic risk.

PROFIT --For diversification to create shareholder value, then bringing together of different businesses under common ownership & must somehow increase their profitability.

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Diversification and Shareholder Value: Porter’s Three Essential Tests

Diversification and Shareholder Value: Porter’s Three Essential Tests

If diversification is to create shareholder value, it must meet three tests:

1. The Attractiveness Test: diversification must be directed towards attractive industries (or have the potential to become attractive).

2. The Cost of Entry Test : the cost of entry must not capitalize all future profits.

3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of “synergy” must be present)

Additional source of value from diversification: Option value

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Competitive Advantage from DiversificationCompetitive Advantage from Diversification

• Predatory pricing/tie-in sales Evidence• Reciprocal buying of these• Mutual forbearance is sparse

MARKETPOWER

• Sharing tangible resources (research labs, distribution systems) across multiple businesses• Sharing intangible resources (brands, technology) across multiple businesses• Transferring functional capabilities (marketing, product development) across businesses• Applying general management capabilities to multiple businesses

• Economies of scope not a sufficient basis for diversification ----must be supported by transaction costs• Diversification firm can avoid transaction costs by operating internal capital and labor markets• Key advantage of diversified firm over external markets--- superior access to information

ECONOMIES OF

SCOPE

ECONOMIESFROM

INTERNALIZINGTRANSACTIONS

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Relatedness in DiversificationRelatedness in Diversification

Economies of scope in diversification derive from two types of relatedness:

Operational Relatedness-- synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D)

Strategic Relatedness-- synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses.

Problem of operational relatedness:- the benefits in terms of economies of scope may be dwarfed by the administrative costs involved in their exploitation.

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Branson & the Virgin Companies: Making strategic sense of apparent entrepreneurial chaos

Branson & the Virgin Companies: Making strategic sense of apparent entrepreneurial chaos

KEY RESOURCES•Virgin brand•Branson -charisma/image --PR skills -networking skills -entrepreneurial flair

DOMINANT LOGIC•Seek competitive advantage by start-up cos. pursuing innovative differentiation in underserved market with sleepy incumbents

CHARACTERISTICS OFMARKETSTHAT CONFORM TO THIS LOGIC•consumer•dominant incumbent •scope for new approaches to customer service•high entry barriers to other start-ups•Branson/Virgin image appeals to customers

DESIGNING A CORPORATE STRATEGY& STRUCTURE• What’s the business model? (Does Virgin create value by being an entrepreneurial incubator, a venture capital fund, a diversified corporation, or what?)• Which businesses to divest?• Criteria for future diversification• What type of structure?—Is there a need for greater formalization?

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PORTFOLIO TECHNIQUES FOR CSP

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History of the BCG Matrix

1960’s – diversification of businesses

Need for universal management tool

First implementation in 1969 by Boston

Consulting Group

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Portfolio Analysis

Strategic Business Unit (SBU) Definition Single independent operation of a company Has its own competitors One manager responsible for performance

Allocation of resources over all SBUs Goals

Set benchmarks Create generalized descriptions of strategic situations

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Basis of the BCG Portfolio Matrix

Time

Introductory Phase “?”

Growth Phase “Star”

Sales V

olume

Mature Phase “Cash Cow”

Decline Phase “Dog”

Source: Das Boston-Consulting-Group-Portfolio Dipl.-Ing. Holger Blumhof

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BCG Matrix Construction

Internal measure: Relative market share Firm’s sales of the SBU .

Total market’s average sales Firm’s Sales of the SBU .

Strongest Competitor’s Sales

External measure: Market growth Match strategy with market stage

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BCG Matrix Format

Vertical Axis = Relative Market Growth Split at 10% by a horizontal line

Horizontal Axis = Relative Market Share Split at 1x by a vertical line

Creates four quadrants in which individual SBUs are positioned as bubbles Bubble size = SBU’s total revenue

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The BCG Matrix

High Low

High

Low

Product Sales Growth Rate

Relative Market Share

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Strategy Recommendations

Investment Further Growth Maintain Market Position

Cash flow Self-sustaining: Fund their own growth Require funds from other SBUs (Cash Cows)

Assure the future of the company Grow into Cash Cows

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Strategy Recommendations

Investment Increase market share Selectively develop into Stars

Cash Flow Require funds from other SBUs (Cash Cows)

Unrealized future opportunities

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Strategy Recommendations

Investment Maintain market share Maintain capacity

Cash Flow Positive cash flow Provides funding to support Stars and “?”

No potential for profit growth

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Strategy Recommendations

Investment Divestiture strategy Reduce capacity to free up resources

Cash Flow Goal of Positive Cash Flow Negative Cash Flow = Divestment

No real growth opportunities

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Evaluation of BCG Matrix: Cons Oversimplifies complex decisions Only 2 factors considered = creates risk Uncertainty in market and SBU definition Only considers current businesses no

dynamics Does not recognize possible synergies

between SBUs Can fall prey to the “GIGO” syndrome

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Evaluation of BCG Matrix: Pros Simple and rapid Solid basis for decision-making Good measurability of market share and

growth Provides information about efficient resource

allocation within the organization Generator for strategic options

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Example of a BCG Matrix for a Fastener Supplier in South East Asia

HighHigh LowLow

High High

Low Low

Product Product Sales Sales Growth Growth RateRate

Relative Market ShareRelative Market Share

Anchoring Anchoring SystemsSystems

Powder Powder Actuated Actuated ToolsTools

Cable Tray Cable Tray SystemsSystems

Electric Electric Power Power ToolsTools

Concrete Concrete Lifting Lifting SystemsSystems

Note that the Anchoring System SBU is forecasted to move to new position

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Conclusion

As long as management understands that the BCG Growth/Share Matrix generates options which require further analysis and validation, this tool can greatly enhance strategic decision making

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GE(General Electric)/McKinsey Multi-Factor Matrix

Originally developed by GE’s planners drawing on McKinsey’s approaches

Market attractiveness is based on as many relevant factors as are appropriate in a given context

Business-position assessment also made on a many factors SBU needs to be rated on each factor

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GE Multifactor Portfolio Matrix Industry Attractiveness

Bu

sin

ess

Str

engt

hs

High

High

Medium

Medium

Low

Low

Invest/Grow

Selectivity/earnings

Harvest /Divest

Protect Position

Invest to Build

Build selectively

Build selectively

Selectively manage for earnings

Limited expansion or harvest

Protect & refocus

Divest

Manage for earnings

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GE Multifactor Portfolio Matrix (Cont’d)

Invest/Grow

Selectivity/earnings

Harvest /Divest

Industry AttractivenessIndustry AttractivenessB

usi

nes

s S

tren

gth

sB

usi

nes

s S

tren

gth

s

HighHigh

HighHigh

MediumMedium

MediumMedium

LowLow

LowLow

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Some Limitations of the GE Model

Subjective measurements across SBUs

Process also highly subjective From the selection and weighting of factors to the

subsequent development of both a firm’s position and the market attractiveness

Businesses may have been evaluated with respect to different criteria

Sensitive to how a product market is defined

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Arthur D. Little’s SBU System The system revolves three concepts- market

segmentation, product life cycle, and competitive position.

Segmentation suggests that the company should be divided into multiple SBU’s; the product life cycle concept holds that the company should be different across different stages of the market evolution; the competitive position encompasses multiple factors apart from market share.

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Steps of ADL System

Definition of SBU’s Classifying SBU’s Developing the strategy Establishing priorities within the portfolio and

achieving objectives after the SBU’s have been classified

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Embryonic Growth Mature Ageing

Dominant Fast growStart-up

Fast growAttain cost leadershipRenewDefend position

Defend positionAttain cost leadershipRenewFast grow

Defend positionFocusRenewGrow with industry

Strong Start-upDifferentiateCatch-up

Fast growCatch-upAttain cost leadershipDifferentiate

Attain cost leadershipRenew, focusDifferentiateGrow with industry

Find nicheHold nicheHang-inGrow with industryHarvest

Favourable Start-upDifferentiateFocusFast grow

Differentiate, FocusCatch-upGrow with industry

Harvest, hang-inFind niche, Hold nicheRenew, turnaroundDifferentiate, focusGrow with industry

RetrenchTurnaround

Tenable Start-upGrow with industryFocus

Harvest, catch-upHold niche, hang-inFind nicheTurnaroundFocusGrow with industry

HarvestTurnaroundFind nicheRetrench

DivestRetrench

Weak Find nicheCatch-upGrow with industry

TurnaroundRetrench

WithdrawDivest

Withdraw

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FORMS OF CORPORATE RESTRUCTURING

Expansion

Sell-offs

Corporate Control

Changes in ownership structure

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MERGERS-- REASONS

Growth

Diversification and market entry

Improving operating efficiency and profitability

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THE MERGER FAILURE- CAUSES(Howe, 1986) Failure to establish objectives for an acquisition. Failure to compare acquisitions with alternative

means of achieving corporate objectives like internal development.

Insufficient attention to the financial details of mergers

Insufficient familiarity on the part of the acquiring company management with the business of target firms, that question the very basis of generating synergies across the two firms, and makes the post merger integration of the two firms difficult.

Insufficient attention to post-merger planning.

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JOINT VENTURES

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Range of Strategic Alliances

Competition Type of Arrangement Cooperation

Low

Lev

el o

f In

tera

ctio

n H

igh

Cooperation Agreement

Cross-licensing

Franchising

R&D Consortia

Patent Licensing

Equity Joint Ventures

Co-production Buy-back

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Joint Ventures as ‘Mode of Choice’ Access to resources that cannot be acquired through market

transactions and the firm cannot or wishes not to develop internally, at least in the short-term 35% of U.S. multinationals 40-45% of Japanese multinationals

Duration varies; tendency to last longer Performance varies (often measured as partners’ satisfaction

with how the venture meets their own objectives) Considered successful in about 50% of the cases Can outperform or refocus the mainstream business

IJV were initially used to exploit North American MNE’s existing competencies in new markets. While learning through joint-ventures has become an increasingly important objective in recent years, it often proves difficult.

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Motives for IJV Formation

Existing Products New Products

Exi

stin

g M

arke

ts

New

Mar

kets

To take existing products to new markets

To strengthen the existing business

To bring foreign products to local markets

To diversify into a new business

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Partners’ Contributions Complementary skills

Unique and continuing contributions Once skills are redundant, IJV may be terminated Different logics in different firms

Learning races (biotech firms) Long-term relationships (buyer-supplier relationships)

Cooperative cultures Work together for joint benefit Avoid decision-making stalemates Avoid a confrontational stance

Seek similarities among the partners when possible (size, industry, rural vs. urban location, functional background)

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Strategic Alliance

Strategic alliance is an inter-firm cooperative relationship that involves trading of mutually beneficial resources such as technologies and skills.

Such relationships are built on credentials of each participant and mutual trust.

Alliance involves sharing of risks with aim of achieving increased gains for each participant.

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Need for Alliance

Regulatory prerequisite Market reach – newer markets for existing

products Newer products for existing markets Cost effectiveness Access to newer skills and technologies