44509667-Strategic-Management

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Strategic Management

Module-I (Introduction)

• To understand the meaning, scope and nature of Strategy and Strategic

Management

• To understand the concept of planning and strategic management process

• To understand how Strategic Management has evolved over years to its current

state today

• To get familiar with major milestones and contributors to the discipline of


• To understand the hierarchy and pattern of strategy development

• To understand the significance and use of Michael Porter’s value chain model

Module I (Objectives)

• Concept of Planning

• Evolution of Strategic Management

• Corporate Strategy

• Patterns of Strategy Development

• Levels of Strategy

• Competitive Scope and Value Chain

Module I (Contents)

Managerial Challenges

Start up Challenges

•Think Big

•Start Small

•Scale up

Progress Challenges

•Forget

•Borrow

•Learn

Evaluation of Management Concerns

Focus Operation Resources Conception Performance Change

Concern Efficiency Risk Position Execution Renewal

ResponseBudgeting &

ProceduresLong Range

Planning Strategy Excellence inExecution

Innovation

Phase-I1950s

Phase-II1960s & 1970s

Phase-III1980s

Phase-IV1990s

Phase-V2000 onwards

Understanding Strategy

“Strategy, the art of war, is especially the planning of movement of troops and ships, into favorable positions; plan of action or policy in business or policies”

Oxford Pocket Dictionary

“Strategy is determination of long term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals”

Alfred Chandler

‘Strategy & Structure’

“Strategy is a set of managerial decisions and actions involved in making a major market-creating business offering”

W. Chan Kim

‘INSEAD Faculty’

“What Business Strategy is all about is, in one word – Competitive Advantage. The sole objective of Strategic Planning is to enable a company to gain, as efficiently as possible, a sustainable edge over its competitors. Corporate Strategy thus implies an attempt to alter a company’s strength relative to that of its competitors in the most efficient way”

Kenichi Ohmae

‘The Mind of the Strategist’

STRATEGY IS DEFINED AS THOSE ACTIONS THAT A COMPANY PLANS, IN RESPONSE TO, OR IN ANTICIPATION OF, CHANGES IN ITS EXTERNAL ENVIRONMENT, ITS CUSTOMERS AND ITS COMPETITORS.

STRATEGY IS A WAY COMPANY AIMS TO IMPROVE ITS POSITION VIS-À-VIS COMPETITION.

Strategy narrowly defined as “ the art of general” (Greek StratAgos).

It defines “what we want to achieve” & chart out course of action, to survive & sustain growth in changing environments. Strategy is a set of Key decisions made to meet Objectives.

strategic competitiveness and above normal returns

concerns managerial decisions and actions which materially affect the success and survival of business enterprises

involves the judgment necessary to strategically position a business and its resources so as to maximize long-term profits in the face of irreducible uncertainty and aggressive competition

strategy is the linkage between a business and its current and future environment

Domain of Strategy

Common Elements in Successful Strategy

Successful Strategy

Profound understanding of the competitive environment

Objective appraisal of resources

Long-term, simple and agreed uponobjectives

$

EFFECTIVE IMPLEMENTATION

Source: Adapted from Robert S. Grant, 1991

Thinking Strategically

• Answers to the following define an overall direction for the organization's grand strategy

Where is the organization now?Where does the organization want to be?What changes are among competitors?What courses of action will help us achieve our goals?

Understanding Strategic Management

• Strategic or institutional management is the conduct of drafting, implementing and evaluating cross-functional decisions that will enable an organization to achieve its long-term objectives

• It is the process of specifying the organization's mission, vision and objectives, developing policies and plans, often in terms of projects and programs, which are designed to achieve these objectives, and then allocating resources to implement the policies and plans, projects and programs.

• Strategic management is a level of managerial activity under setting goals and over Tactics.

• Strategic management provides overall direction to the enterprise and is closely related to the field of Organization Studies

• According to Arieu (2007), "there is strategic consistency when the actions of an organization are consistent with the expectations of management, and these in turn are with the market and the context."

• “Strategic management is an ongoing process that evaluates and

controls the business and the industries in which the company is

involved; assesses its competitors and sets goals and strategies to meet

all existing and potential competitors; and then reassesses each

strategy annually or quarterly [i.e. regularly] to determine how it has

been implemented and whether it has succeeded or needs replacement

by a new strategy to meet changed circumstances, new technology,

new competitors, a new economic environment., or a new social,

financial, or political environment.” (Lamb, 1984:ix)

Strategic ManagementManagers ask such questions as...

What changes and trends are occurring?Who are our customers?What products or services should we offer?How can we offer these products or services

most efficiently?

Concept of Planning

• Concept 1: Organisations need a planning architecture.

A planning architecture is an overview of how different planning processes fit together. It identifies:

• different types of plan• the time horizon of each• when they have to be completed• time allowed for preparing the plan• the frequency of updating• who is responsible• how the different plans fit together.

A Planning Architecture

Concept 2: Planning is an intellectual process.

Concept 3: Planning is a social process.

The Strategic Management Process

Strategic Management Process

Implement Strategy via Changes in: Leadership culture, Structure, HR, Information & control systems

SWOT

Formulate Strategy – Corporate, Business, Functional

Define new Mission objectives, Grand Strategy

Identify Strategic Factors – Strengths, Weaknesses

Identify Strategic Factors – Opportunities, Threats

Scan Internal Environment – Core Competence, Synergy, Value Creation

Evaluate Current Mission, objectives, Strategies

Scan External Environment – National, Global

4 Phases of Strategic Management in a Company

• Basic Financial Planning

-(Meeting annual budgets) • Forecasting-based Planning

-(Incorporating predictions beyond next year)

• Externally Oriented Planning

-(Thinking strategically, Strategic Planning)

• Strategic Management

• -(Considering also the implementation & control aspects when formulating strategies)


The Evolution

Some Questions

• How has the strategy field developed? • How has the thinking in strategy evolved?• How is the thinking in strategy moving towards?• What are the questions in strategy that are not answered?• What are the dilemmas and confusions in the field of strategy• What have been the loop holes in strategy making?• What are the potential models of sustainable strategy?

DOMINANTTHEME

1950s 1960s-early 70s Mid-70s-mid-80s Late 80s –1990s 2000s

Budgetary Corporate Positioning Competitive Strategicplanning & planning advantage innovationcontrol Financial Planning Selecting Focusing on Reconcilingcontrol growth &- sectors/markets. sources of size with

diversification Positioning for competitive flexibility &leadership advantage agility

Capital Forecasting. Industry analysis Resources & Cooperativebudgeting. Corporate Segmentation capabilities. strategy.Financial planning. Experience curve Shareholder Complexity. planning Synergy Portfolio analysis value. Owning

E-commerce. standards. — Knowledge Management—

Coordination Corporate Diversification. Restructuring. Alliances && control by planning depts. Global strategies. Reengineering. networksBudgeting created. Rise of Matrix structures Refocusing. Self-organizsystems corporate Outsourcing. ation & virtual

planning organization

MAINISSUES

KEY CONCEPTS&

TOOLS

MANAGE-MENTIMPLIC-ATIONS

Major Timeline

Major Thought Schools

Alfred Chandler – Corporate Strategy

John Dunning – IB Strategy

C K Prahalad – Inclusive Strategy

Sumantra Ghoshal – Problems in T.C.E.

Historical development of Strategic Management

Birth of strategic management

originated in the 1950s and 60s

Alfred D. Chandler, Jr., Philip Selznick, Igor Ansoff,

Peter F. Drucker

Alfred Chandler

Strategy and Structure “structure follows strategy”

Philip Selznick

Organization's internal factors with external environmental circumstances

SWOT analysis

Igor Ansoff

market penetration strategies

product development strategies

market development strategies

horizontal and vertical integration

diversification strategies

Corporate strategy

Peter Drucker

stressed the importance of objectives

management by objectives (MBO)

Growth and portfolio theory

Profit Impact of Marketing Strategies (PIMS)

effect of market share

Started at General Electric, moved to Harvard in the early 1970s, and then moved to the Strategic Planning Institute in the late 1970s, it now contains decades of

information on the relationship between profitability and strategy

"PIMS provides compelling quantitative evidence as to which business strategies work and don't work" - Tom Peters.

The Japanese challenge:

• Higher employee morale, dedication, and loyalty;

• Lower cost structure, including wages;

• Effective government industrial policy;

• Modernization after WWII leading to high capital intensity and productivity;

• Economies of scale associated with increased exporting;

• Relatively low value of the Yen leading to low interest rates and capital costs, low dividend expectations, and inexpensive exports;

• Superior quality control techniques such as Total Quality Management and other systems introduced by W. Edwards Deming in the 1950s and 60s.

McKinsey 7S Framework

Strategy, Structure, Systems, Skills, Staff, Style, and Supra-ordinate goals

The Mind of the Strategist was released in America by Kenichi Ohmae

Tom Peters -In Search of Excellence

Gaining competitive advantage Gary Hamel and C. K. Prahalad Strategic intent and strategic architecture

Dave Packard and Bill Hewlett devised an active management style that they called Management By Walking Around (MBWA).

Michael Porter cost minimization strategies, product differentiation strategies, and

market focus strategies

The Military Theorists

• Business War Games by Barrie James, 1984 • Marketing Warfare by Al Ries and Jack Trout, 1986 • Leadership Secrets of Attila the Hun by Wess Roberts , 1987

Philip Kotler was a well-known proponent of marketing warfare strategy

• Offensive marketing warfare strategies • Defensive marketing warfare strategies • Flanking marketing warfare strategies • Guerrilla marketing warfare strategies

Strategic change

In 1968, Peter Drucker (1969) coined the phrase Age of Discontinuity

In 2000, Gary Hamel discussed strategic decay

In 1978, Abell, D. described strategic windows and stressed the importance of the timing (both entrance and exit) of any given strategy

Clayton Christensen (1997)

1-disruptive technology

2-agnostic marketing (no one knows how in what quantities a disruptive product will be used before experiencing the product)

Henry Mintzberg (1988) – Strategy was much more fluid and unpredictable than people had thought

• Strategy as plan - a direction, guide, course of action - intention rather than actual

• Strategy as ploy - a maneuver intended to outwit a competitor

• Strategy as pattern - a consistent pattern of past behaviour - realized rather than intended

• Strategy as position - locating of brands, products, or companies within the conceptual framework of consumers or other stakeholders - strategy determined primarily by factors outside the firm

• Strategy as perspective - strategy determined primarily by a master strategist

Information and technology driven strategy

• Peter Drucker had theorized the rise of the “knowledge worker” back in the 1950s

• In 1990, Peter Senge, who had collaborated with Arie de Geus at Dutch Shell, borrowed de Geus' notion of the learning organization

• People can continuously expand their capacity to learn and be productive

• New patterns of thinking are nurtured

• Collective aspirations are encouraged, and • People are encouraged to see the “whole picture” together.

Senge identified five components of a learning organization. They are:

• Personal responsibility • Self reliance

• Mastery of Mental models

• Team learning -“a spirit of advocacy to a spirit of enquiry” • Systems thinking

The psychology of strategic management

informal, intuitive, non-routinised, and involving primarily oral, 2-way communications

“feeling”, “judgement”, “sense”, “proportion”, “balance”, “appropriateness”.

Criticisms of strategic management

marketing myopia

In 2000, Gary Hamel coined the term strategic convergence

Ram Charan, aligning with a popular marketing tagline, believes that strategic planning must not dominate action. "Just do it!",

Journals/Magazines devoted primarily to Strategic Management

• Strategic Management Journal • Harvard Business Review • Long Range Planning • The Economist• MIT Sloan Management Review• Academy of Management Journal

Corporate Strategy

• Corporate Strategy• Approach to future that involves (1) examination of the current and anticipated factors associated with

customers and competitors (external environment) and the firm itself (internal environment),

(2) envisioning a new or effective role for the firm in a creative manner, and

(3) aligning policies, practices, and resources to realize that vision.

Industry Attractiveness

Which Industry should we be in?

Competitive Advantage

How Should we Compete?

Rate of Return above the Cost of

CapitalHow do we make

money?

BusinessStrategy

Corporate Strategy

Corporate Strategy.

Over all attitude of corporation towards its various businesses and product lines in terms of Stability growth & management.

e.g.. Big Bazaars Corporate Strategy of growth diversifying base in retailing into delivery business.

I. Directional Strategy: CORPORATE STRATEGIESB. Growth Strategies:To expand company’s activities

1. Concentration:Growth potential & concentration of resources on current product lines.

a. Vertical Growth:Taking over Suppliers/Distributors Function

i. Back Ward Integration:Take over supplier’s fn.

ii. Forward Integration:Take over Distributor’s fn.

Amount of Vertical Integration Full IntegrationInternally 100%own key supplies & distribution

Taper IntegrationInternally less than 50% own key supplies

OutsourcingLong term contract for key supplies & distribution

b. Horizontal Growth:Expanding in the geographical location & increasing

Product & Services in current markets Popular methods to horizontal growth internationally.

Exporting Licensing Franchising Joint Ventures Acquisitions Green Field Development Production Sharing Turnkey operations Management contracts Build, Operate, Transfer (BOT)

I. DIRECTIONAL STRATEGY: A. Growth Strategies:2. Diversification:Less growth potential in current product lines

a. Concentric Diversifying in related product or services.the search for synergy, the concept for two business can generate more profits together than separately. The point may be similar technology, customer usage, distribution, managerial skills, or product similarity .

b. Conglomerate Diversifying in unrelated product or services. It is concerned primarily with financial considerations of cash flow or risk reduction. To transfer its excellent management system into less well managed acquired firm.

B. Stability: Make no changes in company’s activities

1. Pause Strategy:

2. No Change Strategy:

3. Profit Strategy:

C. Retrenchment Strategy:

1. Turn around: Contraction ‘Stop the Bleeding’ Cut back Size & Cost.

Consolidation: Stream Line the company IBM Computer Service Provider

2. Captive company:Company becomes another company’s sole Supplier or Distributor.

3. Sell out/ Divestment: hotmail, Ranbaxy etc.

4. Bankruptcy / Liquidation:

II. Portfolio StrategyHow individual product lines & business units can gain competitive advantage in the marketplace by

using competitive & cooperative Strategies.

III. Parenting Strategy:Mgt. Coordinates activities & transfers resources & cultivates capability among product lines & business units.

Patterns of Strategy Development

Levels of Strategy

• Arrange the following terms in a logical hierarchy:– Company

– Division

– Strategic Business Unit (SBU)

– Corporation

– Industry

– Value Chain

– Person

– Department

– Market

– Industry

– Value Chain

– Company

– Department

– Person A market refers to the place where A market refers to the place where goods and services are exchanged.goods and services are exchanged.

• Arrange the following terms in a logical hierarchy:

– Corporation– Division / SBU– Company

Rumelt's Typology of Diversification

1. Single Product: 95% of revenues from a single product line

2. Dominant Product: 70-94% of revenue from a single product line

3. Related Product: Less than 70% of revenue from a single product line and and the remainder of revenues from a related product domain

4. Unrelated Product: Less than 70% of revenue from a single product and remainder of revenues from an unrelated product domain

FUNCTIONAL STRATEGY:Maximize Resource Productivity

It is concerned with developing & nurturing a distinctive competence to provide a company or business unit with a

competitive advantage

CORPORATE STRATEGY:Overall Direction of Company and Management of Businesses

BUSINESS STRATEGY:Competitive & Cooperative Strategies

It occurs at Business unit or Product level.It emphasizes on improvement of competitive position of

Corporations product & services

Functional Strategy supports Business Strategy which in turn supports the Corporate Strategy

ORGANIZATIONAL STRUCTURE

&

LEVELS OF STRATEGY

Business

Strategy

Corporate Strategy

Functional Strategy

Div-A Div-B Div-C

Prod. HR Fin. Marketing

CorporateHead Office

Corporate Level Strategy• What businesses are we in? What businesses should

we be in?• Four areas of focus

– Diversification management (acquisitions and divestitures)

– Synergy between units– Investment priorities– Business level strategy approval (but not crafting)

Corporate-Level Strategies

FirmStatus

Valuablestrengths

Criticalweaknesses

Environmental StatusAbundant

environmentalopportunities

Criticalenvironmental

threats

Corporategrowth

strategies

Concentric Diversification(Economies of Scope)

ConglomerateDiversification(Risk Mgt.)

Corporateretrenchment

strategiesCan still go for business-level growth

(economies of scale)

Corporatestability

strategies

Business Level Strategy• How do we support the corporate strategy?• How do we compete in a specific business arena?• Three types of business level strategies:

– Low cost producer– Differentiator– Focus

• Four areas of focus– Generate sustainable competitive advantages– Develop and nurture (potentially) valuable capabilities– Respond to environmental changes– Approval of functional level strategies

Functional / Operational Level Strategy

• Functional: How do we support the business level strategy?

• Operational: How do we support the functional level strategy?

• An example.

• Business L.S.: Become the low cost producer of widgets

• Functional L.S. (Mfg.): Reduce manufacturing costs by 10%

• Operational (Plant #1): Increase worker productivity by 15%

A Simple Organization Chart(Single Product Business)

Business

Research andDevelopment

Manufacturing MarketingHuman

ResourcesFinance

FunctionalLevelStrategy

BusinessLevelStrategy

A Simple Organization Chart(Dominant or Related Product Business)

MultibusinessCorporation

Corporate Level

Business 1(Related)

Business 2(Related)

Business 3(Related)

BusinessLevel

Research andDevelopment

Manufacturing MarketingHuman

ResourcesFinance

FunctionalLevel

An example of an Unrelated Product Business(Note: By itself, an SBU can be considered a related product business)

A (Multi-business)

Corporation

Ex.: G.E. (GeneralElectric Corp.)

Strategic Business Unit 1

S.B.U. 2

Company 1 Co. 2 Co. 3 Division 1 Div. 2 Div. 3

SBU: a single business or collection of related businesses that is independent and formulates its own strategy

Competitive Scope and Value Chain

How a firm can actually create and sustain a competitive advantage in its

industry ?

Two Basic Types

• Cost leadership

• Differentiation

Value Chain

• Identify which activities contributing to cost leadership and differentiation

• Analyze the source of competitive advantage

Value Chain

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Procurement

Firm Infrastructure

Human Resource Management

Technology Development

PrimaryActivities

SupportingActivities

Primary Activities

• Inbound LogisticsReceiving, storing, and disseminating inputs. E.g., warehousing, inventory control

• OperationsTransforming inputs into the final product form

Primary Activities• Outbound Logistics

Collecting, storing and distributing the product to buyers

• Marketing and SalesProviding a means and incentive which allow buyers to purchase the product

• ServiceProviding service to enhance or maintain the value of the product

Primary Activity Focus by IndustryIndustry Inbound

LogisticsOperations Outbound

LogisticsMarketing & Sales

Service

Distributor X X

Restaurant X NA

Corporate Lending

X

Xerox X

Support Activities

• Procurement

Function of purchasing inputs used in the value chain

• Technology Development

Support Activities

• Human Resource Management

• Firm Infrastructure

planning, finance, accounting, legal, etc.

Competitive Scope

• Four scopes may affect value chain

• Ex. The value chain serves minicomputer requires extensive sales assistance, less hardware performance – different from what serves small business

Competitive Scope

• Segment ScopeDifferences required to serve different product or buyer segment

• Vertical ScopeDivision of activities between a firm and its suppliers, channels, and buyers

Competitive Scope

• Geographic Scope

Different geographic areas

• Industry Scope

Interrelationships among business units

“Generic” Competitive Advantage

• Cost Leadership

• Differentiation

• Focus

Competitive StrategiesCompetitive Advantage

Lower Cost Differentiation

Com

petitive S

cope

BroadTarget

Cost Leadership Differentiation

NarrowTarget

Cost Focus Differentiation Focus

Cost Leadership Strategy

Steps to achieve cost leadership• Make cost assignment• Identify cost drivers• Understand cost dynamics• Control cost drivers• Reconfigure the value chain

Operating Cost Assignment

Firm Infrastructure (9%)

Operations (67%)

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s (3

%)

(27%)

(40%)

Procurement (1%)

Human Resources Management (2%)

Technology Development(9%)

Mar

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Sal

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6%

)

OutboundLogistics (1%)

Mar

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(5%

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%)

Purchased Operating Inputs

Human Resource Costs

Asset Assignment

Firm Infrastructure (16%)

Operations (67%)Inbound Logistics

(38%)

(8%)

Procurement (2%)

Human ResourcesManagement (1%)

Technology Development(2%)

Marketing & Sales (1%)

OutboundLogistics (1%)

Serv

ice

(2%

)

(15%)Liquid Assets

Fixed Assets

(5%)

(6%)

(2%)

Why cost assignment

• Understand the firm’s cost structure

• Find cost drivers of each cost segment

• Match cost structure to buyer’s value chain

• Configure and reconfigure the cost structure

Cost Leadership – Cost Drivers

Factors affect costs.


• Economies or diseconomies of scale• Learning and spillover• Pattern of capacity utilization

– When fixed cost high, capacity utilization is important

• Linkages How other activities are performed– Linkages within the Value Chain– Vertical Linkages


• InterrelationshipsWith other business units within a firm

• IntegrationVertical integration in a value activity

• Timing


• Discretionary policiesPolicies that reflect a firm’s strategy

• Location• Institutional factors

e.g., government regulations, financial incentives, unionization, etc.

Identify Cost Drivers

Cost Dynamics

• What cause the change of cost drivers

Cost Dynamics

• Industry real growth• Differential scale sensitivity• Different learning rates• Differential technological change• Relative inflation of costs• Aging• Market adjustment

How to Achieve Cost Advantage

Cost Position

composition of afirm’s valuechain versuscompetitors’

Cost Advantage

a firm’s relativeposition vis-à-visthe cost driversof each activity

Reconfigure thevalue chain

Control costdrivers

achieve

Analyze Cost Advantage

Your costAdvantage

Ma

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Firm Infrastructure

Human Resource Management

Technology Development

Procurement

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Control Cost Drivers

• E.g., control scale – gain the appropriate firm size

Reconfigure the Value Chain• Reconfiguration of the value chain presents the opportunity to

fundamentally restructure a firm’s cost, compared to settling for incremental improvements.

• By altering the basis of competition in a way that favors a firm’s strengths, it may change the important cost drivers in a way that favors a firm.

Steps in Strategic Cost Analysis

1. Identify the appropriate value chain and assign costs and assets to it.

2. Diagnose the cost drivers of each value activity and how they interact.

3. Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences.

4. Develop a strategy to lower relative cost position through controlling cost drivers or reconfiguring the value chain and/or downstream value.

Cost Focus

A firm dedicates its efforts to a well-chosen segment of an industry can often lower its costs significantly.

Differentiation

• Emphasize on a unique source of differentiation in the Value Chain, rather than on products or markets only

• Differentiation base on buyers’ value, not only difference that buyers do not value

• Should consider the cost of differentiation

Uniqueness Buyers’ ValueDifferentiation

Identify Sources of Differentiation

Mar

gin

Your strength which canlead to differentiation and

then improve buyers’ value

Drivers of Uniqueness

• Policy Choices• Linkages

– Linkages within the value chain– Supplier linkages– Channel linkages

• TimingBe the first

• Location

Drivers of Uniqueness

• InterrelationshipSharing a value activity with sister business units. E.g., sharing a sales force for both insurance and other financial products

• Proprietary learning• Integration – e.g., integrating online systems to current ordering

systems• Scale• Institutional factors – e.g., “Madame’s route”

Why buyers purchase?

Purchasing Criteria• User criteria – firms to meet them by lowering cost

or raising buyer performance• Signaling criteria – telling buyers what benefits to

get

Differentiation for creating Buyer Value by

• Lowering buyer cost• Raising buyer performance• Signaling the value

• Linking the firm’s value chain to the buyer’s value chain

Through

Steps in Differentiation

1. Determine who the real buyer is2. Identify the buyer’s value chain and the firm’s

impact on it3. Determine ranked buyer purchasing criteria4. Assess the existing and potential sources of

uniqueness in a firm’s value chain

Steps in Differentiation5. Identify the cost of existing and potential sources of

differentiation6. Choose the configuration of value activities that

creates the most valuable differentiation for the buyer relative to cost of differentiating

7. Test the chosen differentiation strategy for sustainability

8. Reduce cost in activities that do not affect the chosen forms of differentiation

Cost-leadership Strategy

• Do everything to achieve a CA through producing products or services at a lower unit cost (lowering cost structure) charge a lower price.

• Increase efficiency and lower costs – the manufacturing and materials management functions are the center of attention

• A low-level of product differentiation – it means that you do not want to be the industry leader in differentiation.

• Target the average customer – Scale and Focus, not Product Variety- ignores the different market segments – focuses on mass market.

Advantages and Disadvantages of Cost-leadership Strategy

• Advantages- charge a lower price yet make the same level of profit.- win in the price war.- low-cost as an entry barrier.- protected from rivals.- less affected by powerful buyers and suppliers.- room to reduce its price to compete with substitute products.

• Disadvantages- technological advancement makes the low cost advantage outdated. - imitation ability of competitors. - lose sight of changes in customers’ tastes

Differentiation Strategy

• Do everything to achieve a CA through producing products or services that are unique to customers charge a premium price.

• Achieved in 3 principal ways – quality, innovation, & responsiveness to customers

• Try to differentiate along as many dimensions as possible – the bases of differentiation are endless (prestige, status,…)

• R&D, Sales, & Marketing functions are center of attention.

• Serve many market segments (i.e., a broad differentiator)

Advantages and Disadvantages of Differentiation Strategy

• Advantages- Premium price.

- Protected from rivals. (i.e., brand loyalty, customer loyalty..)

- Brand loyalty as an entry barrier.

- Less affected by powerful buyers and suppliers.

• Disadvantages

- Substitutes can be a possible threat.

- Difficult to maintain a product’s uniqueness in customers’ eyes for a long time.

Focus Strategy• Try to achieve a CA by serving the needs of a specific market segment or niche (i.e.

geographically, product line, customer type,..).

• Pursue a focus strategy through either a low-cost approach or a differentiation - focused cost-leadership- focused differentiation (i.e., a specialized differentiator)

• Try to build market share in one or a few market segments and, if successful, then begin to serve more segments.

• Pursue any distinctive competency

Advantages and Disadvantages ofFocused Strategy

• Advantages- Exploration of a gap in the market customer loyalty.

- Stay close to its customers and respond to their changing needs. (faster in innovations).

- In general, a focused firm is O.K. against the threats of five forces.

• Disadvantages- Cost disadvantage relative to low-cost leader b/c of a small volume.

- Susceptible to attack from a broad differentiator.

- Technological change or changes in customers’ tastes can make a niche market disappear.

Other Discussion

• Creative Industries

• Supply Chain Management

• What is “Buyer’s Value Chain”?


Module-II (Strategic Analysis)

• Understanding the hierarchical structure of Strategic Intent• Describe the forces in the macro environment organization using ETOP

and PESTLE framework• Understanding advantages and disadvantages to a firm through SAP• Develop Scenarios and explain their implications• Use Five forces framework to identify the sources of competition for a

SBU• Define strategic groups, market segments and CSFs and explain how

these concepts help in understanding competition• Explain the different type of strategic gap that might present

opportunities or threats to organizations• Understanding SWOT Analysis

Module Outcome

• Mission• Vision • Business Definition• Environmental Threat and Opportunity Profile (ETOP) • Industry Analysis • Strategic Advantage Profile (SAP)• Competitor Analysis • Market Analysis • Environmental Analysis and Dealing with Uncertainty • Scenario Analysis • SWOT Analysis

Module Content

Vision, Mission and Business Definition

Whether you are starting a new company or improving an existing one, you should define its purpose for existence. Then it is important to have a mission, plans and a vision for your company or business enterprise.

Questions you may have include:

• What factors are in the purpose of a business?

• How do you define a mission?

• What about a business concept?

Vision/Mission Statements• Statements that explain who we are

– Type of organization– Products/services– Needs we fill

• Statements that explain our direction, our purpose, our reason for being– What difference do we make?

• Statements that explain what makes us unique– Values– People– Combination of products and services

Major Components of theStrategic Plan / Down to Action

Mission

Vision

Goals

Objectives

Measures

Why we existWhy we exist

What we want to beWhat we want to be

Indicators and Indicators and Monitors of successMonitors of success

Desired level of Desired level of performance and performance and timelinestimelines

Planned Actions to Planned Actions to Achieve Objectives Achieve Objectives

O1 O2

AI1 AI2 AI3

M1 M2 M3

T1 T1 T1

Specific outcomes expressed in Specific outcomes expressed in measurable terms (NOT activities)measurable terms (NOT activities)

Strategic Plan

Action Plans

Evaluate Progress

Targets

Initiatives

What we must achieve to be successfulWhat we must achieve to be successful

VISION : Desired future state; the aspiration of the Organization

What are our Dreams and Aspirations?

What do we want to look like in 5, 10, 15 years?

Where do we want to go?

• How the organization wants to be perceived in the future – what success looks like • An expression of the desired end state • Challenges everyone to reach for something significant – inspires a compelling future• Provides a long-term focus for the entire organization • A guiding philosophy• Consistent with organizational value• Influenced by the strengths and weaknesses of the

business

Components of a Vision Statement• Core ideology

– Core Values - timeless guiding principles

– Core Purpose - reason for being

• Envisioned future– Big Hairy Audacious Goals (BHAG) - clearly articulated goals

– Vivid description - a graphic description of what success and the future will be like

• Recognition of service to stakeholders– Owners/creditors

– Employees

– Customers

Essentials of good Business Vision Statement

• A statement that clearly defines the firm’s “reason” for being in business– Should significantly stretch the resources and capabilities of

the farm

– Should inspire people in the organization to achieve things they never thought possible

– Should unite people in the organization toward the pursuit of one common goal

• Adept

• Aggressive

• Agile

• Aligned

• Assertive

• Available

• Best-in-class

• Challenging

• Clear

• Competent

• Complex

• Compliant

• Conservative

• Coordinated

• Critical

• Direct

• Equal

• Disciplined

• Effective

• Efficient

• Enduring

• Expanding

• Expert

• Fast

• Fast-paced

• Financially-sound

• Focused

• Growth

• Healthy

• Improving

• Incentivized

• Increasing

• Solid

• Solvent

• Stable

• State of the Art

• Strong

• Streamlined

• Sufficient

• Strategic

• Sustainable

• Timely

• Value-added

• Vigilant

• Visionary

• World-class

• Informative

• Innovative

• Leading

• Logical

• Major

• Nimble

• Pioneering

• Protected

• Organized

• Over-Arching

• Quick

• Ready

• Responsive

• Savvy

• Simple

VISION STATEMENTS• McDonald’s• To give each customer, every time, an experience that sets new

standards in value, service, friendliness, and quality.• NASDAQ• To build the world’s first truly global securities market . . . A

worldwide market of markets built on a worldwide network of networks . . . linking pools of liquidity and connecting investors from all over the world . . . assuring the best possible price for securities at the lowest possible cost.

132

• Petsmart

• To be the premier organization in nurturing and enriching the bond between people and animals.

• Wachovia

• Wachovia’s vision is to be the best, most trusted and admired financial services company.

133

MISSION :It is the unique purpose or reason for organization’s existence.

Overriding purpose in line with the values or expectations of the stakeholders

Who are we?What business are we in?

eBayWe help people trade anything on earth.

We will continue to enhance the online

trading experiences of all – collectors,

dealers, small businesses, unique item

seekers, bargain hunters, opportunity

sellers, and browsers.”

• The mission statement of an organization is normally short, to the point, and contains the following elements:– Provides a concise statement of why the organization exists, and

what it is to achieve;– States the purpose and identity of the organization;– Defines the institution's values and philosophy; and– Describes how the organization will serve those affected by its

work.

Good Mission Statements

Focus on limited number of goalsStress major policies and valuesDefine major competitive spheres within which the company will

operate by defining the: Industry.Products and applications.Competence. Market-segmentGeographical Vertical limit

Examples – Good and BadMission Statements

To Make People Happy

To Explore the Universe and Search for Life and to Inspire the Next Generation of Explorers

NASA

Walt Disney

Does a good job of expressing the core values of the organization. Also conveys unique qualities about the organization.

Too vague and and unclear. Need more descriptive information about what makes the organization special.

• MISSION STATEMENTS• Bristol-Myers Squibb• Our mission is to extend and enhance human life by

providing the highest-quality pharmaceuticals and health care products.

• GlaxoSmithKline• GSK’s mission is to improve the quality of human life by

enabling people to do more, feel better and live longer.139

• Merck• The mission of Merck is to provide society with superior

products and services by developing innovations and solutions that improve the quality of life and satisfy customer needs, and to provide employees with meaningful work and advancement opportunities, and investors with a superior rate of return.

• Wipro• The mission is to be a full-service, global outsourcing company.

140

Mission Elements

CustomersMarkets

Employees

PublicImage

Self-Concept Philosophy

SurvivalGrowthProfit

ProductsServices

Technology

Importance of Mission

MissionResource Allocation

Unanimity of Purpose

Organizational Climate

Focal point for work structure

Benefits from a strong mission

Mission Statement Evaluation MatrixOrganization Name Customers Products

ServicesMarkets Concern for

Survival, Growth, Profitability

Technology

Organization 1

Organization 2

Mission Statement Evaluation Matrix

Organization Name Philosophy Self-Concept Concern for Public Image

Concern for Employees

Organization 1

Organization 2

Vision vs. Mission

• The vision is more broad and future oriented – the goal on the horizon

• The mission is more focused – how you will get to the horizon

GOAL: General statement of Aim or Purpose.

It is an open ended statement of what one wishes to accomplish with no quantification and no time frame for completion.

• Describes a future end-state – desired outcome that is supportive of the mission and vision.• Shapes the way ahead in actionable terms.• Best applied where there are clear choices about the future.• Puts strategic focus into the organization – specific ownership of the goal should be assigned to someone within the organization. • May not work well where things are changing fast – goals tend to be long-term for environments that have limited choices about the future.

Developing Goals• Cascade from the top of the Strategic Plan – Mission, Vision, Guiding Principles.• Look at your strategic analysis – SWOT, Environmental Scan, Past Performance, Gaps . . • Limit to a critical few – such as five to eight goals.• Broad participation in the development of goals: Consensus from above – buy-in at the execution level.• Should drive higher levels of performance and close a critical performance gap.

Reorganize the entire organization for better responsiveness to customersReorganize the entire organization for better responsiveness to customers

We will partner with other businesses, industry leaders, and government agencies in order to better meet the needs of stakeholders across the entire value stream.

We will partner with other businesses, industry leaders, and government agencies in order to better meet the needs of stakeholders across the entire value stream.

Manage our resources with fiscal responsibility and efficiency through a single comprehensive process that is aligned to our strategic plan.

Manage our resources with fiscal responsibility and efficiency through a single comprehensive process that is aligned to our strategic plan.

Improve the quality and accuracy of service support information provided to our internal customers.

Improve the quality and accuracy of service support information provided to our internal customers.

Establish a means by which our decision making process is market and customer focus.Establish a means by which our decision making process is market and customer focus.

Maintain and enhance the physical conditions of our public facilities.Maintain and enhance the physical conditions of our public facilities.

OBJECTIVE : Quantification or more precise statement of objective

Definable: It should defined to compare the performance

Quantifiable: It should be expressed in terms of “Value Or Market share”

( Avoid Vague terms such as “increase, improve or maximize”)

Achievable:

e.g. To increase sales of product globally by 30% in real terms within 5yrs.

To increase market share for the product in the India from 10%-15% over 2yrs

• Relevant - directly supports the goal• Compels the organization into action• Specific enough so we can quantify and measure the

results• Simple and easy to understand• Realistic and attainable• Conveys responsibility and ownership• Acceptable to those who must execute• May need several objectives to meet a goal

GOALS OBJECTIVES

Very short statement, few words

Longer statement, more descriptive

Broad in scope Narrow in scope

Directly relates to the Mission Statement

Indirectly relates to the Mission Statement

Covers long time period (such as 10 years)

Covers short time period (such 1 year budget cycle)

GOAL OBJECTIVE STRATEGY

To be No. 1in the market

Increase market share by 15% in three years

i) Increase product promotion

ii) Design product pricing

iii) Penetration

iv) New market development

v) Product-Service mix

vi) Quality improvement

Business Definition

• A Business Definition is a clear statement of the business the firm is engaged in or is planning to enter.

What is our Business in precise way:• “We are in the beauty enriching Business” (Helen

and Curtis)• “ We are in the Business of Computing Technology”

(Intel)• “We are Watch makers of the nation” (HMT)• “We are in the transportation business” (TELCO)

Business DefinitionAbell’s Framework

http://www.12manage.com/methods_abell_three_dimensional_business_definition.html

• Business Definition Statements• Define the ‘space’ that the business wants to create for

itself in competitive terrain• Broadly specifies the opportunities that the business may

exploit within the space and the threats it may encounter from rival firms in course of time

• Must be defined in broad ways, keeping changing customer tastes and aspirations in mind

Product Oriented V/S market Oriented

Company Product Definition Market Definition

Railways We run railways We are a people and Goods mover

Oil Company We Sell Gasoline We supply energy

Film Producing Company We make movies We make entertainment

Air conditioning company We make air conditioners We provide climate control in the home

Publishing Company We produce and sell books We distribute information

Copying Company We make copying equipments We help improve office productivity

• Questions to be examined before defining nature and scope of operations

1) Who is the customer? Where is the customer located, how to reach the customer, how does the customer buy etc.

2) What does the customer buy?

3) What does the customer consider value?

CORE : Resources, Processes, Skills COMPETENCE and Experience, which

provide superior Competitive Advantage

STRATEGY : Long Term Direction

STRATEGIC : Combination of Resources, ARCHITECTURE Processes and Competencies

to put strategy in action

CONTROL : Monitoring of Action Stepsto :

(a) Assess effectiveness of Strategies & Action

(b) Modify Strategies & Action as necessary

VALUES

What do we prize?

What drives our business?

What are our criteria for making ethical decisions?

Guiding Principles and Values

• Every organization should be guided by a set of values and beliefs• Provides an underlying framework for making decisions – part of the organization’s culture• Values are often rooted in ethical themes, such as honesty, trust, integrity, respect, fairness, . . . .• Values should be applicable across the entire organization• Values may be appropriate for certain best management practices – best in terms of quality, exceptional customer service, etc.

Examples of Guiding Principles and Values

We obey the law and do not compromise moral or ethical principles – ever! We expect to be measured by what we do, as well as what we say.

We obey the law and do not compromise moral or ethical principles – ever! We expect to be measured by what we do, as well as what we say.

We treat everyone with respect and appreciate individual differences. We carefully consider the impact of business decisions on our people and we recognize exceptional contributions.

We treat everyone with respect and appreciate individual differences. We carefully consider the impact of business decisions on our people and we recognize exceptional contributions.

We are strategically entrepreneurial in the pursuit of excellence, encouraging original thought and its application, and willing to take risks based on sound business judgment.

We are strategically entrepreneurial in the pursuit of excellence, encouraging original thought and its application, and willing to take risks based on sound business judgment.

We are committed to forging public and private partnerships that combine diverse strengths, skills and resources.

We are committed to forging public and private partnerships that combine diverse strengths, skills and resources.

MARKETS

Which markets should we be in?

Which markets do we need to create?

What should be our basic Customer Orientation?

CORE COMPETENCIES

What are we good at?

What do we need to be good at?

How can we leverage our competencies into products and services for market we serve?

PRODUCTS & SERVICES

What kinds of products and services should we provide for the markets we serve?

How do we use these products to carve out a market niche?

BUSINESS ENVIRONMENT

What Threats and Opportunities do we face from Environmental Factors?

How do we track Key Environmental Activities and Trends?

STAKEHOLDERS

Which group of individuals are affected by the way we do business?

How do we establish win-win relationship with our stakeholders?

Stakeholders

• individuals and groups who have an interest in a firm’s performance and an ability to influence its actions

• Interest in performance coupled with ability to influence the firm through their decision to support the firm or not – companies have important relationships with their stakeholders.

170

Strategic Leaders• Individuals who practice strategic leadership –

making sure that decisions are made that will ensure their firm’s success.– Example: Steve Jobs & Apple

– The CEO

– The Board of Directors

– Both are responsible for setting the organizational culture.172

Strategic Leadersthough many different people may be involved, the final responsibility

for effective use of the strategic management process rests with the firm’s top-level strategic leaders (i.e., the chief executive officer and the top management team). In addition, it is important to note that the best strategic leaders as well as all others throughout the firm also act ethically.

173

CRITICAL RESOURCES

Which are the Critical Resources do we need to do business?

What should we do to ensure a steady supply of these Resources?

ENVIRONMENTALTHREAT

AND OPPORTUNITY PROFILE

ETOP ANALYSIS

PEST ANALYSIS SWOT ANALYSIS

WHY ETOP??o Helps organization to identify O-T

o To consolidate and strengthen organization’s position

o Provides the strategists of which sectors have a favourable impact on the organization.

o Organization knows where its stands with respect to its environment.

o Helps in formulating appropriate strategy

ETOP ANALYSIS

Economic factors: Technological factors:

• General economic condition.

• Rate of inflation.

• Interest rate/Exchange rate.

• Source of technology.

• Technological development.

• Impact of technology.

Socio cultural factors :Environmental factors:

o Demographic characteristics.

o Social attitudes.

o Education level , awareness, and consciousness of rights.

o Weather change

o Climatic change.

o Demand related factors.

o Suppliers related factors.

ETOP ANALYSIS

ETOP ANALYSIS

Political factors : Legal factors :

o Political system.

o Political structure , its goals and stability.

o Government policies , degree of intervention

o Policies related to licensing , monopolies.

o Policies related to export and import.

o Policies related to distribution and pricing.

FACTORS COULD INCLUDE

Political international trade, taxation policy

Economic interest rates, exchange rates, national income, inflation, unemployment, Stock Market

Social ageing population, attitudes to work, income distribution

Technological innovation, new product development, rate of technological obsolescence

Environmental global warming, environmental issues

Legal competition law, health and safety, employment law

THREAT MATRIX

Major

Thre

ats Mod

erat

e

Thre

ats

Moder

ate

Thre

ats Min

or

Thre

ats

HIGH

HIGH

LOW

LOW

ATTRACTIVENESS

PROBABILITY OF OCCURENCE

OPPURINITY MATRIX

Very

attra

ctive Mod

erat

ely

Attrac

tive

Moder

atel

y

Attrac

tive Le

ss

Attrac

tive

HIGH

HIGH

LOW

LOW

ATTRACTIVENESS

PROBABILITY OF OCCURENCE

PREPARING ETOP

o Dividing the environment in different sector.

o Analyzing the impact of each sector on the organization.

o Subdividing each environmental sector into sub factor.

o Impact of each sub sector on organization in form of a statement.

ETOP: Pros and Cons

Pros Cons

o Help to determine the key factor of threats and opportunities.

o Good tool to qualify the factors related to company’s strategy.

o Can consider many factors for each special case.

o It doesn’t show the interaction between the factors.

o It can’t reflect the dynamic environment.

o It’s a subjective analysis tool.

Industry Analysis: The FundamentalsIndustry Analysis: The Fundamentals

• The objectives of industry analysis

• From environmental analysis to industry analysis

• Porter’s Five Forces Framework

• Applying industry analysis

• Industry & market boundaries

• Identifying Key Success Factors

Objectives of Industry Analysis• To understand how industry structure drives competition, which

determines the level of industry profitability.

• To assess industry attractiveness

• To use evidence on changes in industry structure to forecast future profitability

• To formulate strategies to change industry structure to improve industry profitability

• To identify Key Success Factors

THE INDUSTRYENVIRONMENT

• Suppliers• Competitors• Customers

Social structure

The national/ The national/ international international

economyeconomy

TechnologyTechnology

GovernmentGovernment& Politics& Politics

The natural The natural environmentenvironment

Demographic Demographic structurestructure

Social structureSocial structure

From Environmental Analysis to Industry Analysis

From Environmental Analysis to Industry Analysis

•The Industry Environment lies at the core of the Macro Environment.

•The Macro Environment impacts the firm through its effect on the Industry Environment.

Profitability of US IndustriesProfitability of US Industries

Pharmaceuticals 26.8 Gas & Electric Utilities 10.5Tobacco 22.0 Food and Drug Stores 10.3Household & Personal Products 20.5 Motor Vehicles & Parts 9.8Food Consumer Products 20.3 Home Equipment 9.5Medical Products & Equipment 18.8 Railroads 9.0Beverages 18.8 Hotels, Casinos, Resorts 8.0Scientific & Photographic Equipt. 16.5 Insurance: Life and Health 7.6Commercial Banks 16.0 Building Materials, Glass 7.0Publishing, Printing 14.3 Metals 6.0Petroleum Refining 14.3 Semiconductors &Apparel 14. 3 Electronic Components 5.8Computer Software 13.5 Insurance: Property & Casualty 5.3Electronics, Electrical Equipment 13.3 Food Production 5.3Furniture 13.3 Telecommunications 3.5Chemicals 12.8 Forest and Paper Products 3.5Computers, Office Equipment 11.8 Communications Equipment (4.0)Health Care 11.5 Airlines (34.8)

Median return on equity (%), 1999-2002

The Determinants of Industry ProfitabilityThe Determinants of Industry Profitability

3 key influences:

• The value of the product to customers

• The intensity of competition

• Relative bargaining power at different levels within the value chain.

The Spectrum of Industry StructuresThe Spectrum of Industry Structures

Concentration

Entry and ExitBarriers

ProductDifferentiation

Information

Perfect Competition

Oligopoly Duopoly Monopoly

Many firms A few firms Two firms One firm

No barriers Significant barriers High barriers

HomogeneousProduct

Potential for product differentiation

PerfectInformation flow

Imperfect availability of information

Porter’s Five Forces of Competition Framework

Porter’s Five Forces of Competition Framework

SUPPLIERS

POTENTIALENTRANTS SUBSTITUTES

BUYERS

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrants

Threat of

substitutes

THREAT OF ENTRY•Capital requirements•Economies of scale•Absolute cost advantage•Product differentiation•Access to distribution channels•Legal/ regulatory barriers•Retaliation

SUBSTITUTECOMPETITION

• Buyers’ propensity to substitute• Relative prices & performance of substitutes

BUYER POWER• Buyers’ price sensitivity • Relative bargaining power

INDUSTRY RIVALRY•Concentration•Diversity of competitors•Product differentiation•Excess capacity & exit barriers•Cost conditions

BUYER POWER• Buyers’ price sensitivity • Relative bargaining power

The Structural Determinants of CompetitionThe Structural Determinants of Competition

Threat of SubstitutesThreat of Substitutes

Extent of competitive pressure from producers of

substitutes depends upon:

• Buyers’ propensity to substitute

• The price-performance characteristics of substitutes.

The Threat of EntryThe Threat of EntryEntrants’ threat to industry profitability depends upon the height of barriers to entry. The principal sources of barriers to entry are:

• Capital requirements

• Economies of scale

• Absolute cost advantage

• Product differentiation

• Access to channels of distribution

• Legal and regulatory barriers

• Retaliation

Bargaining Power of BuyersBargaining Power of Buyers

Buyer’s price sensitivity Relative bargaining power• Cost of purchases as % of buyer’s total costs. • How differentiated is the purchased item? • How intense is competition between buyers? • How important is the item to quality of the buyers’ own output?

• Size and concentration of buyers relative to sellers. • Buyer’s information . • Ability to backward integrate.

Note: analysis of supplierpower is symmetric

Rivalry Between Established CompetitorsRivalry Between Established Competitors

The extent to which industry profitability is depressed by aggressive price competition depends upon:

• Concentration (number and size distribution of firms)

• Diversity of competitors (differences in goals, cost structure, etc.)

• Product differentiation

• Excess capacity and exit barriers

• Cost conditions

– Extent of scale economies

– Ratio of fixed to variable costs

Profitability and Market GrowthProfitability and Market Growth

-5

0

5

10

15

20

25

30

Return on sales Return on investment Cash flow/Investment

< -5% -5% to 0 0 to 5% 5% to 10% > 10%

Less than -5% -5% to 0 0 to 5% 5% to 10% Over 10%

Return on sales Cash flow/ InvestmentReturn on investment

ANNUAL RATE OF GROWTH OF MARKET DEMAND

ROI (%)

The Impact of Unionization on ProfitabilityThe Impact of Unionization on Profitability

Percentage of employees unionizedNone 1%-35% 35%-60% 60-75% >75%

ROI (%) 25 24 23 18 19

ROS (%) 10.8 9.0 9.0 7.9 7.9

ROI = Return on Investment

ROS = Return on Sales

Applying Five - Forces AnalysisApplying Five - Forces Analysis

Forecasting Industry Profitability• Past profitability a poor indicator of future profitability.

• If we can forecast changes in industry structure we can predict likely impact on competition and profitability.

Strategies to Improve Industry Profitability• What structural variables are depressing profitability

• Which can be changed by individual or collective strategies?

Drawing Industry Boundaries : Identifying the Relevant Market

Drawing Industry Boundaries : Identifying the Relevant Market

• What industry is BMW in:– World Auto industry

– European Auto industry

– World luxury car industry?

• Key criterion: SUBSTITUTABILITY– On the demand side : are buyers willing to substitute between types of cars and

across countries

– On the supply side : are manufacturers able to switch production between types of cars and across countries

• May need to analyze industry at different levels for different types of decision

Identifying Key Success FactorsIdentifying Key Success Factors

Pre-requisites for success

• What drives competition? • What are the main dimensions of competition? • How intense is competition? • How can we obtain a superior competitive position?

Analysis of demand

• Who are our customers?

• What do they want?

KEY SUCCESS FACTORS

Analysis of competitionAnalysis of competition

• What drives competition?What drives competition?

• What are the main dimensions What are the main dimensions of competition?of competition?

•How intense is competition?How intense is competition?

•How can we obtain a superior How can we obtain a superior competitive position?competitive position?

What do customers What do customers want?want?

How does the firm survive How does the firm survive competitioncompetition

Pre-requisites for success

Identifying Key Success Factors Through Modeling Profitability: The Airline IndustryIdentifying Key Success Factors Through

Modeling Profitability: The Airline Industry

Profitability = Yield x Load factor - Unit Cost Income Revenue RPMs Expenses ASMs RPMs ASMs ASMs

= x -

• Price competitiveness. • Efficiency of route planning.• Flexibility and responsiveness.• Customer loyalty.• Meeting customer requirements.

• Wage rates.• Fuel efficiency of planes.• Employee productivity.• Load factors.• Administrative overhead.

• Strength of competition on routes.

• Responsiveness to cha- anging market conditions

• % business travelers.

• Achieving differentiation advantage

ASM = Available Seat Miles RPM = Revenue Passenger Miles

ROCE

Return on Sales

Sales/Capital Employed

Sales mix of products

Avoiding markdowns throughtight inventory control

Max. buying power to minimizecost of goods purchased

Max. sales/sq. foot through:*location *product mix*customer service *quality control

Max. inventory turnover through electronic data interchange, closevendor relationships, fast delivery

Minimize capital deploymentthrough outsourcing & leasing

Identifying Key Success Factors by Analyzing Profit Drivers: Retailing

Identifying Key Success Factors by Analyzing Profit Drivers: Retailing

SUMMARY: What Have We Learned?SUMMARY: What Have We Learned?

Forecasting Industry Profitability• Past profitability a poor indicator of future profitability.• If we can forecast changes in industry structure we can predict likely impact on competition and

profitability.

Strategies to Improve Industry Profitability• What structural variables are depressing profitability?• Which can be changed by individual or collective strategies?

Defining Industry Boundaries

• Key criterion: substitution• The need to analyze market competition at different levels of aggregation

(depending on the issues being considered)

Key Success Factors

• Starting point for the analysis of competitive advantage

Strategic Advantage Profile (SAP)

VRIO FRAMEWORK

• Resource-asset, competency, skill,knowledge

e.g. patents, brand name,

• Value: Does it provide competitive advantage?

• Rarity: Do other competitors possess it?

• Imitability: Is it costly for others to imitate?

• Organisation: Is the firm organised to exploit the resource?

• Identify firms resources-S&W

• Combine firms strength into specific capabilities

• Appraise-profit potential, sustainable competitive advantage, ability to convert it to a profitable proposition

• Select strategy -firm’s resources& capability relative to external opportunity

• Identify resource gaps and invest in upgrading weaknesses

VRIO Steps

Strategic Advantage Profile (SAP) - Steps

1) The organization should identify the factors which are relevant for determining success in the industry concerned.

2) At the next level, the organization should measure its performance on these factors in comparison to its competitors. Based on the comparison, the organization can find out whether it has advantage or disadvantage in terms of various factors. An advantage is the situation which helps the organization to do better than its competitors. A disadvantage is the situation which affects the competitive position of the organization adversely. Further, advantages/disadvantages should be measured in terms of degree because all advantages/disadvantages may not be equal.

3) After identifying advantages, the next step is to measure their sustainability because any advantage may turn into disadvantage due to change in environmental factors. For example, many companies had competitive advantage in pre-liberalized era which turned into disadvantage because of entry of new competitors in post-liberalized era.

SAP is a summary statement, which provides an overview of the advantages and disadvantages in key areas likely to affect future operations of the firm. It is a tool for making a systematic evaluation of the strategic advantage factors, which are significant for the company in its environment. The following is an example of the SAP analysis of a hypothetical company

Capability Factor Competitive strengths / Weakness

•Finance High cost of capital, reserves & surplus

•Marketing Fierce competition, company position secure

•Operational Excellent -parts & components available

•Personnel Quality of management & personnel par with competition

•General High Quality experienced top management -take proactive stance

Strategic Advantage Profile (SAP)

Competitor Analysis

Concerns of an Org.’s competitive analysis

1. Who are our competitors?

2. How can our competitors be grouped meaningfully?

3. What are our competitors’ strengths and weaknesses?

4. What are our competitors’ objectives and strategies?

5. How are our competitors likely to react to changes in the

marketing environment?

Concerns of an Org.’s competitive analysis (1)

Competitor identification

1. Who are our competitors?

Similar specific-same product, technology and target market

Similar general-same product area, but different segments

e.g. Haagen daze vs. Wall’s

Different specific-same need satisfied by different means

e.g. Eurostar vs. British airway

Different general-competing for discretionary spend

e.g. holiday vs. new car

Concerns of an Org.’s competitive analysis (2)2. How can our competitors be grouped meaningfully?Different characteristics for identifying Strategic groupings

Source: Adapted from Wilson et al. (1992).


3. What are competitive strengths and weaknesses

• Requires use of various information sources.

• Consider in terms of critical success factors:

e.g. manufacturing, technical and financial strength, relationships with supplier and customer, its market and segment, product range, its volume, cash and profits etc.

• Information can be used to plan and launch attack.


4. What are our competitors’ objectives and strategies?

Objectives – related to cash generation, market share,

technological leadership, quality recognition

etc.

Find clues in product portfolio.

Strategy - related to its positioning, marketing mix etc.


5. How are our competitors likely to react to changes in the

marketing environment?

Learn by experience

Not easy to predict its reaction due to: its cost structures,

relative market positions, product life cycle, industrial

position etc.

Useful information about competitors

Source: Wilson et al. (1992).

Future ObjectivesFuture ObjectivesHow do our goals compare to our competitors’ goals?How do our goals compare to our competitors’ goals?Where will emphasis be placed in the future?Where will emphasis be placed in the future?What is the attitude toward risk?What is the attitude toward risk?

Competitor AnalysisCompetitor Analysis

What drives the competitor?What drives the competitor?


What is the competitor doing?What is the competitor doing?What can the competitor do?What can the competitor do?


Current StrategyCurrent StrategyHow are they currently competing?How are they currently competing?

Does this strategy support changes in the competitive structure?

Does this strategy support changes in the competitive structure?


What does the competitor believe about itself and the industry?What does the competitor believe about itself and the industry?


Current StrategyCurrent StrategyHow are we currently competing?How are we currently competing?

Does this strategy support changes in the competition structure?


Do we assume the future will be volatile?Do we assume the future will be volatile?

Are we assuming stable competitive conditions?Are we assuming stable competitive conditions?

What assumptions do our competitors hold about the industry and themselves?


AssumptionsAssumptions


What are the competitorWhat are the competitor’’s s capabilities?capabilities?What are the competitorWhat are the competitor’’s s capabilities?capabilities?






Are we operating under a status quo?Are we operating under a status quo?




What are my competitors’ strengths and weaknesses?What are my competitors’ strengths and weaknesses?

How do our capabilities compare to our competitors?

How do our capabilities compare to our competitors?

CapabilitiesCapabilities





Dynamic Head-to-Head RivalryDynamic Head-to-Head Rivalry


Are we operating under a status quo?Are we operating under a status quo?




ResponseResponseResponseResponseWhat will our competitors What will our competitors do in the future?do in the future?What will our competitors What will our competitors do in the future?do in the future?Where do we have a Where do we have a competitive advantage?competitive advantage?Where do we have a Where do we have a competitive advantage?competitive advantage?

How will this change our How will this change our relationship with our relationship with our competition?competition?

How will this change our How will this change our relationship with our relationship with our competition?competition?

CapabilitiesCapabilitiesCapabilitiesCapabilitiesWhat are my competitorsWhat are my competitors’’ strengths and weaknesses?strengths and weaknesses?What are my competitorsWhat are my competitors’’ strengths and weaknesses?strengths and weaknesses?

How do our capabilities How do our capabilities compare to our competitors?compare to our competitors?How do our capabilities How do our capabilities compare to our competitors?compare to our competitors?

Market AnalysisThe role of market analysis is to determine the

attractiveness of market and to understand its evolving opportunities and threats as they relate to internal strength and weakness of the firm

Dimensions of Market Analysis (David A. Aaker)

• Market size (current and future)

• Market growth rate

• Market profitability

• Industry cost structure

• Distribution channel

• Market trends

• Key success factors

Market SizeThe size of the market can be evaluated based on:

• Present sales• Potential sales (if expanded)

Some information sources for determining market size:• Government data• Trade associations• Financial data from major players• Customer survey

Market Growth RateA simple means of forecasting the market growth rate is to extrapolate (infer or estimate) historical data into the future. While this method may provide a first-order estimate, it does not predict important turning points. A better method is to study growth drivers such as demographic information and sales growth in complementary products.

Ultimately, the maturity and decline stages of the product life cycle will be reached. Some leading indicators of the decline phase include:

• Price pressure caused by competition

• Decrease in brand loyalty

• Emergence of substitute products

• Market saturation

• Lack of growth drivers

Market Profitability

While different firms in the market will have different levels of profitability, the average profit potential for a market can be used as a guideline for knowing how difficult it is to make money in the market.

Industry Cost Structure

The cost structure is important for identifying key factors for success. To this end, Porter’s value chain model is useful for determining where value is added and for isolating the costs.

The cost structure also is helpful for formulating strategies to develop a competitive advantage. For example, in some environments the experience curve effect can be used to develop a cost advantage over competitors.

Experience Curve Diagram

Distribution ChannelThe following aspects of the distribution system are useful in a market analysis:

• Existing distribution channel– can be described by how direct they are to the customer.

• Trends and emerging channels– new channels can offer the opportunity to develop a competitive advantage.

• Channel power structure– for example, in the case of a product having little brand equity, retailers have

negotiating power over manufacturers and can capture more margin.

Market Trends

Changes in the market are important because they often are the source of new opportunities and threats. The relevant trends are industry-dependent, but some examples include changes in price sensitivity, demand for variety, and level of emphasis on service and support. Regional trends also may be relevant.

Key Success Factors– Elements that are necessary in order for the firm to achieve its

marketing objectives.

few examples are:– Access to essential unique resources– Ability to achieve economies of scale– Access to distribution channels– Technological progress

It is important to consider that key success factors may change over time, especially as the product progresses through its life cycle.

Analysis of the External Environment

The External Environment

General Environment• Dimensions in the broader society that influence an industry and

the firms within it:

– Demographic

– Economic

– Political/legal

– Sociocultural

– Technological

– Global

The General Environment: Segments and Elements

Analysis of the External Environments

• General environment

– Focused on the future

• Industry environment

– Focused on factors and conditions influencing a firm’s profitability within an industry

• Competitor environment

– Focused on predicting the dynamics of competitors’ actions, responses and intentions

Analysis of the Internal Environment


• 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.

Internal Analyses’ Outcomes

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

Unique resources, Unique resources, capabilities, and capabilities, and competenciescompetencies((required forrequired for sustainable competitive sustainable competitive advantageadvantage))

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.

Components of Internal Analysis Leading to Competitive Advantage and Strategic Competitiveness

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

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.

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.

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

Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core Competencies

Source: Adapted from R. Amit & P. J. H. Schoemaker, 1993, Strategic assets and organizational rent, Strategic Management Journal, 14: 33.

Resources, Capabilities and Core Competencies

• Resources– Are the source of a firm’s capabilities.

– Are broad in scope.

– Cover a spectrum of individual, social and organizational phenomena.

– Alone, do not yield a competitive advantage.

Discovering CoreDiscovering CoreCompetenciesCompetencies

ResourcesResources•TangibleTangible•IntangibleIntangible


CoreCoreCompetenciesCompetencies

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

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

Sources: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 101; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 100–102.

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

Sources: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13: 136–139; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 101–104.


• 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






• 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.





Examples of Firms’ Capabilities

Functional Areas Capabilities

Distribution Effective use of logistics management techniques

Human resources Motivating, empowering, and retaining employees

Management Effective and efficient control of inventories through

information systems point-of-purchase data collection methods

Marketing Effective promotion of brand-name products

Effective customer service

Innovative merchandising

Management Ability to envision the future of clothing

Effective organizational structure

Manufacturing Design and production skills yielding reliable products

Product and design quality

Miniaturization of components and products

Research & Innovative technology

development Development of sophisticated elevator control solutions

Rapid transformation of technology into new products and processes

Digital technology


• Four criteria for determining strategic capabilities:

– Value

– Rarity

– Costly-to-imitate

– Nonsubstitutability






• 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.






• 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.





Building Core Competencies

• Four Criteria of Sustainable Competitive Advantage

– Valuable capabilities

– Rare capabilities

– Costly to imitate

– Nonsubstituable


• ValuableValuable• RareRare• Costly to imitateCostly to imitate• NonsubstitutableNonsubstitutable

Four Criteria of Four Criteria of Sustainable AdvantagesSustainable Advantages

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.





• 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


• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable



• Nonsubstitutable Capabilities– No strategic equivalent

• Firm-specific knowledge

• Organizational culture

• Superior execution of the chosen business model




Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

Scenario Analysis

What is Scenario?

-Engage in systematic conjecture

-Human beings are constantly writing scenarios, interpreting signals in the environment and reframing them into meaningful images and trajectories in to the

future.

Introduction • For Many years, it was believed obtaining accurate forecasts

lay in the development of complex, quantitative models.• With just a little more time, a few more equations and a lot

more dollars, these models would be able to provide forecast.• Many users have become disillusioned with forecasting

models, attempt to predict the future from fancy mathematical manipulations of historical data.

Feedback and feed-forward

Scenario planning is the combination of scenario analysis for strategic purposes and strategic planning based on the outcome of the scenario

phase

The relations between possible, probable and desired future

What is not Scenario?• Scenario is not a forecast, neither a vision

• It does not seek numerical precision. It usually provides a more qualitative and contextual

description of how the present will evolve in to the

future.

• It is not assured.

Scenario analysis usually tries to identify a set of possible future, each of whose occurrence is plausible

Definition of Scenario• Vocabulary: Scenario is an outline of a natural or expected course of events.• Kahn and Weiner: A hypothetical sequence of events constructed for the purpose of focusing attention.• Porter An internally consistent view of what the future might turn out to be• Ringland: That part of strategic planning which relates to the tools and technologies for managing

the uncertainties of the future • Schnaars: Identify plausible future environments that the firm might face.

Forecasting and Uncertainty

Crude Oil Rigs in US, (Prediction)

Crude Oil Rigs in US, (Reality)

Future is not continuation of the past necessarily

Scenario in Business

• 22% of “Fortune 1000”, were using scenario analysis in the 1970s

• 75% of these firms adopted the approach after the oil embargo in 1973

• It is essential to keep the number of factors that are considered to a minimum.

Time Horizon• Scenario analysis has been used primarily in long-term

forecasting.• Most firms that used scenario analysis employed 5-year

horizon.• But in Xerox 15-year Shell, 15-year at least.• The content of scenario becomes progressively more vague

as the time horizon lengthens.• The ideal time horizon of scenario analysis is specific to the

industry, product or market under consideration.

Historical Background

• Herman Kahn: was writing scenarios as far back as the 1950s.

• “Thinking the Unthinkable”

• Shell in 1970s.

• SRI (Stanford Research Institute): Future of American Society until 2000.

History

The Number of Scenarios to Generate

• Consensus is that three scenario are best. Although two tend to classified as “good-and-bad”, while more than three become unmanageable in the hands of users.

Arraying Scenarios• Scenarios are inevitably arrayed over some back-ground themes. • Four background themes: 1-Favorability to the Sponsor: Selecting an optimistic and then an pessimistic. “Surprise-free” or ‘baseline” scenario 2-Probability of Occurrence One of the scenarios is labeled as “most likely”. Scenarios are possibilities, not probabilities. 3-Single, Dominant Issue Sometimes there is a single dominant factor whose outcome is central to the item being forecast. Like economy, government policy. 4-Themes In most business applications there is more than a single unknown. There are many issues

which compete, combine and interact with one another to characterize the future. Three scenarios as: Economic expansion, Environmental concern, and Technological domination.

Scenario projects could be used for different purposes and with different focuses

Characteristic of traditional planning compared with the scenario planning approach

Scenario planning is well suited to the task of dealing with paradigmatic, non-linear change

Methods of Constructing Scenarios

1-Highly Qualitative Procedures

2-Practical Procedures

3-Cross-Impact Analysis

1-Highly Qualitative Procedures

• Kahn: -A simplistic intuition or an expression of bias rather than a careful synthesis and balancing of the analysis with more subtle qualitative considerations. -“Surprise-free” scenario• Godet: -”Exploratory Prospective Analysis” -Holistic and integrative analysis • Durand: -Intuitive analysis

Critic: They rely so heavily on intuitive and subjective analysis that they are difficult to implement.

2-Practical Procedures

• More practical means of generating scenarios in business environment:

-Identifying factors are expected to affect forecasting situation at hand.

-Postulating a set of plausible future values for each of these factors.

-Selecting a few plausible scenarios from a large number of possible combinations of the values of these factors.

• Two Approaches on selecting strategies: -Deductive -Inductive

3-Cross-Impact Analysis• Emerged from early work on the Delphi Technique• It’s Basic philosophy of Cross-Impact is that no development

occurs in isolation. Rather, it is rendered more or likely by the occurrence of other events.

• Cross-Impact attempts to capture these ‘cross-impacts’ from the judgmental estimates of experts.

• Data from experts are then input into a computer simulation or mathematical program.

Critic: Judgmental estimates are surely not amenable to any mathematical machinations.

Few Comments on Scenarios1. The most important part of scenario analysis is to think about the

problem.2. The most difficult in scenario analysis is how to reduce a large

number of potential future outcomes to a few plausible scenarios. The number of possible scenarios grows quickly as the number of factors increases.

3. Two methods: -Inductive: If the number of factors is small (<5), examine every

possible scenarios from this set. -Deductive: When many factors are considered, rather than

examining every possible combination, set the tone of scenarios. It means to decide whether the scenarios will represent an optimistic and pessimistic views of the future, or characterize some dominant themes.

Advantages of Scenario• Scenario writing is a planning instrument.• It is also an effective learning tool. Thinking in scenarios helps us understand the logic of

developments, clarify driving forces, key factors, key players and our potential to exert an influence.

• It proceeds more from the gut than from the computer. Although it may incorporate the results of quantitative models.

• It shows a slight accuracy comparing with other models of forecasting. Specially when uncertainty is high.

Scenario as powerful instrument

• Brain-compatible format: Scenario thinking matches the way the brain function. Narrative format (images and stories) makes them easily memorable.

• Opening-up of divergent thinking: By forcing your mind to think about qualitatively different directions, you train your capability to think the unthinkable.

• Complexity-reducing format: Complex business or general environments can be reduced to a manageable amount of uncertainty.

• Communicative format: Scenarios are easy to communicate and to discuss.

Weaknesses of ScenarioIf scenarios are powerful, why haven’t they been more widely If scenarios are powerful, why haven’t they been more widely

used?used?• Uncertainty in conclusions: It does not give one single answer about the

future. Therefore it does not provide the security that is often required in decision making.

• Counterintuitive to managerial simplicity: It does not accord with the managerial simplicity that says that there is one right answer to every question. Scenario planning is a more holistic or systemic approach to planning than traditional methods.

• Soft methods and soft answers: Scenario techniques are usually qualitative, the results are often presented in qualitative terms that fir poorly with traditional numbers-oriented cultures.

• Time consuming: Workshop-based methods are time consuming in terms of the number of hours and days the participants need to spend to get thorough results.

• Secrecy: Most of Scenarios adopted in the companies are arcane and impractical

Scenario Analysis at Shell

• Shell makes use of a strategic planning process in which a series of “what if “ scenarios are created

• The management at all levels is made to think strategically about the company’s business environment

Strategy

Shell’s scenario analysis

Testimonial

In early 1986, the price of oil fell to USD 10 per barrel and Shell’s scenario analysis proved successful as it was in a better position than its competitors to face the situation

• Shell has deployed processes and systems to anticipate future scenarios by analyzing the interplay of environmental factors and its impact on Shell’s business

• Scenario analysis presents complex interactions of future in a simplified, easy to understandable form

• By picking the more probable scenarios, the company can brace or prepare itself for exploiting future opportunities and challenges

• It helps the company in formulating strategy and decide the trade-offs required

Identify trends and their drivers

Develop contingent strategies to tackle each scenario

Develop the what, why and how of different scenarios

Identify parameters to monitor the environment

http://images.google.com/imgres?imgurl=http://www.bpvizcenter.com/images/partners/Shell_logo_500x500.jpg&imgrefurl=http://www.bpvizcenter.com/partners.php&h=500&w=500&sz=68&tbnid=LqxYehXjWOkJ:&tbnh=127&tbnw=127&hl=en&start=3&prev=/images%3Fq%3Dshell%2Blogo%26svnum%3D10%26hl%3Den%26lr%3D%26rls%3DGGLD,GGLD:2005-14,GGLD:en%26sa%3DN

SWOT Analysis

SWOT Analysis

Identifying

internal strengths (S)

and weaknesses (W)

and also examining

external opportunities (O) and

threats (T)

©South-Western College Publishing

SSWWOOTT

Things the company does well.Things the company does well.

Things the company does not do well.Things the company does not do well.

Conditions in the external environment that favor strengths.Conditions in the external environment that favor strengths.

Conditions in the external environment that do not relate to existing strengths or favor areas of current weakness.

Conditions in the external environment that do not relate to existing strengths or favor areas of current weakness.

InternalInternal

ExternalExternal

Production Costs Marketing Skills Employee Capabilities Financial Resources Available Technology Company/Brand Image

Strengths and WeaknessesStrengths and WeaknessesINTERNALINTERNAL

Strengths and WeaknessesStrengths and WeaknessesINTERNALINTERNAL

Wal- Mart SWOT Analysis

• Wal-Mart is powerful retail brand.

• Wal-Mart has grown substantially over recent years and has experienced global expansion.

• Wal-Mart has a core competence involving its use of IT to support its international logistics system.

• A focused strategy is in place for HRM and development.

Strengths


• Wal- Mart is the World’s largest grocery retailer and control of its empire, despite its IT advantages, could leave it week in some areas due to the huge span of control

• Since Wal-Mart sell products across many sectors, it may not have the flexibility of some of its more focused competitors.

• The company is global, but has a presence in relatively few countries Worldwide.

Weaknesses

Opportunities and ThreatsOpportunities and ThreatsEXTERNALEXTERNAL

Opportunities and ThreatsOpportunities and ThreatsEXTERNALEXTERNAL

Social

Demographic

Economic

Technological

Political/Legal

Competitive


• To take over, merge with, or form strategic alliances with other global retailers.

• There are tremendous opportunities for future business expansion.

• New locations and store types offer Wal-Mart opportunities.

• Opportunities exist for Wal-Mart to continue with its current strategy of large, super centres.

Opportunities


• Being number one means that Wal-Mart is the target of competition, locally and globally.

• Being a global retailer means that Wal-Mart is exposed to political problems in the countries where it has operations.

• Intense price competition.

Threats

TOWS Matrix

Four Types of Strategies

WT Strategies

ST Strategies

WO Strategies

SO Strategies

ThreatsOpportunitiesWeaknesses

Strengths(TOWS)

SO Strategies

SO Strategies

Use a firm’s internal

strengths to take advantage

of external opportunities


Strengths(TOWS)

WO Strategies

WO Strategies

Improving internal

weaknesses by taking

advantage of external

opportunities


Strengths(TOWS)

ST Strategies

ST Strategies

Using firm’s strengths to

avoid or reduce the impact of

external threats.


Strengths(TOWS)

WT Strategies

WT Strategies

Defensive tactics aimed at

reducing internal

weaknesses and avoiding

environmental threats.


Strengths(TOWS)

Strategy Analysis & Choice

The TOWS Matrix

• List the firm’s key external opportunities• List the firm’s key external threats• List the firm’s key internal strengths• List the firm’s key internal weaknesses


The TOWS Matrix• Match internal strengths with external opportunities and record

the resultant SO Strategies• Match internal weaknesses with external opportunities and

record the resultant WO Strategies• Match internal strengths with external threats and record the

resultant ST Strategies• Match internal weaknesses with external threats and record the

resultant WT Strategies

TOWS Matrix

WT Strategies

Minimize weaknesses and avoid threats

ST Strategies

Use strengths to avoid threats

Threats-T

List Threats

WO Strategies

Overcome weaknesses by taking

advantage of opportunities

SO Strategies

Use strengths to take advantage of opportunities

Opportunities-O

List Opportunities

Weaknesses-W

List Weaknesses

Strengths-S

List Strengths

Leave Blank

319


Module-III (Strategic Choice )

• Traditional Approach - Strategic Alternatives

• Various models like BCG, GE Nine Cell Matrix, Hofer’s Model, Strickland’s Grand

Strategy Selection Matrix, Basis of Choice

• Michael Porter’s Approach - Generic competitive strategies, Cost advantage,

differentiation,

• Technology and competitive advantage, substitution, competitor, complementary products

and competitive advantage

• Strategic vision vs. strategic opportunism

• Coevolving and patching.

Module III (Contents)

Learning Objectives1. Discuss seven different topics for long-term corporate objectives2. Describe the five qualities of long-term corporate objectives that make them useful

to strategic managers3. Explain the generic strategies of low-cost leadership, differentiation, and focus4. Discuss the importance of the value disciplines5. List, describe, evaluate, and give examples of 15 grand strategies that decision

makers use in forming their company’s competitive plan6. Understand the creation of sets of long-term objectives and grand strategies options

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Long-Term Objectives

• Strategic managers recognize that short-run profit maximization is rarely the best approach to achieving sustained corporate growth and profitability

• To achieve long-term prosperity, strategic planners commonly establish long-term objectives in seven areas:

– Profitability – Productivity– Competitive Position – Employee Development– Employee Relations – Productivity– Tech Leadership – Public Responsibility

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Qualities of Long-Term Objectives

• There are five criteria that should be used in preparing long-term objectives:

– Flexible

– Measurable

– Motivating

– Suitable

– Understandable

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The Balanced Scorecard

• The balanced scorecard is a set of measures that are directly linked to the company’s strategy

– Developed by Robert S. Kaplan and David P. Norton, it directs a company to link its own long-term strategy with tangible goals and actions.

– The scorecard allows managers to evaluate the company from four perspectives:

• financial performance

• customer knowledge

• internal business processes• learning and growth

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The Balance Scorecard

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Generic Strategies• A long-term or grand strategy must be based on a core idea about

how the firm can best compete in the marketplace. The popular term for this core idea is generic strategy.

• 3 Generic Strategies:

1. Striving for overall low-cost leadership in the industry.

2. Striving to create and market unique products for varied customer groups through differentiation.

3. Striving to have special appeal to one or more groups of consumers or industrial buyers, focusing on their cost or differentiation concerns.

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Low-Cost Leadership

• Low-cost producers usually excel at cost reductions and efficiencies • They maximize economies of scale, implement cost-cutting

technologies, stress reductions in overhead and in administrative expenses, and use volume sales techniques to propel themselves up the earning curve

• A low-cost leader is able to use its cost advantage to charge lower prices or to enjoy higher profit margins

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Differentiation

• Strategies dependent on differentiation are designed to appeal to customers with a special sensitivity for a particular product attribute

• By stressing the attribute above other product qualities, the firm attempts to build customer loyalty

• Often such loyalty translates into a firm’s ability to charge a premium price for its product

• The product attribute also can be the marketing channels through which it is delivered, its image for excellence, the features it includes, and its service network

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Focus

• A focus strategy, whether anchored in a low-cost base or a differentiation base, attempts to attend to the needs of a particular market segment

• A firm pursuing a focus strategy is willing to service isolated geographic areas; to satisfy the needs of customers with special financing, inventory, or servicing problems; or to tailor the product to the somewhat unique demands of the small- to medium-sized customer

• The focusing firms profit from their willingness to serve otherwise ignored or underappreciated customer segments

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Risks of the Generic Strategies

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Competitive Strategies


Lower Cost Differentiation

Com

petitive S

cope

BroadTarget

Cost Leadership Differentiation

NarrowTarget

Cost Focus Differentiation Focus

The Value Disciplines

• Operational Excellence

– This strategy attempts to lead the industry in price and convenience by pursuing a focus on lean and efficient operations

• Customer Intimacy

– Customer intimacy means continually tailoring and shaping products and services to fit an increasingly refined definition of the customer

• Product Leadership

– Companies that pursue the discipline of product leadership strive to produce a continuous state of state-of-the-art products and services

Grand Strategies• Grand strategies, often called master or business strategies, provide

basic direction for strategic actions • Indicate the time period over which long-rang objectives are to be

achieved • Any one of these strategies could serve as the basis for achieving the

major long-term objectives of a single firm • Firms involved with multiple industries, businesses, product lines, or

customer groups usually combine several grand strategies

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Concentrated Growth

• Concentrated growth is the strategy of the firm that directs its resources to the profitable growth of a dominant product, in a dominant market, with a dominant technology

• Concentrated growth strategies lead to enhanced performance

• Specific conditions favor concentrated growth

• The risks and rewards vary

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Market Development• Market development commonly ranks second only to concentration as

the least costly and least risky of the 15 grand strategies • It consists of marketing present products, often with only cosmetic

modifications, to customers in related market areas by adding channels of distribution or by changing the content of advertising or promotion

• Frequently, changes in media selection, promotional appeals, and distribution are used to initiate this approach

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Product Development

• Product development involves the substantial modification of existing products or the creation of new but related products that can be marketed to current customers through established channels

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Innovation• These companies seek to reap the initially high profits associated with

customer acceptance of a new or greatly improved product

• Then, rather than face stiffening competition as the basis of profitability shifts from innovation to production or marketing competence, they search for other original or novel ideas

• The underlying rationale of the grand strategy of innovation is to create a new product life cycle and thereby make similar existing products obsolete

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Horizontal Integration

• When a firm’s long-term strategy is based on growth through the acquisition of one or more similar firms operating at the same stage of the production-marketing chain, its grand strategy is called horizontal integration

• Such acquisitions eliminate competitors and provide the acquiring firm with access to new markets

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Vertical Integration

• When a firm’s grand strategy is to acquire firms that supply it with inputs (such as raw materials) or are customers for its outputs (such as warehouses for finished products), vertical integration is involved

• The main reason for backward integration is the desire to increase the dependability of the supply or quality of the raw materials used as production inputs

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Vertical and Horizontal Integration

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Concentric Diversification

• Concentric diversification involves the acquisition of businesses that are related to the acquiring firm in terms of technology, markets, or products

• With this grand strategy, the selected new businesses possess a high degree of compatibility with the firm’s current businesses

• The ideal concentric diversification occurs when the combined company profits increase the strengths and opportunities and decrease the weaknesses and exposure to risk

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Conglomerate Diversification

• Occasionally a firm, particularly a very large one, plans acquire a business because it represents the most promising investment opportunity available. This grand strategy is commonly known as conglomerate diversification.

• The principal concern of the acquiring firm is the profit pattern of the venture

• Unlike concentric diversification, conglomerate diversification gives little concern to creating product-market synergy with existing businesses

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Turnaround

The firm finds itself with declining profits• Among the reasons are economic recessions, production inefficiencies, and

innovative breakthroughs by competitors • Strategic managers often believe the firm can survive and eventually recover if

a concerted effort is made over a period of a few years to fortify its distinctive competences. This is turnaround.

• Two forms of retrenchment: – Cost reduction – Asset reduction

7-343

Elements of Turnaround

• A turnaround situation represents absolute and relative-to-industry declining performance of a sufficient magnitude to warrant explicit turnaround actions

• The immediacy of the resulting threat to company survival is known as situation severity

• Turnaround responses among successful firms typically include two stages of strategic activities: retrenchment and the recovery response

• The primary causes of the turnaround situation have been associated with the second phase of the turnaround process, the recovery response

7-344

Divestiture• A divestiture strategy involves the sale of a firm or

a major component of a firm

• When retrenchment fails to accomplish the desired turnaround, or when a nonintegrated business activity achieves an unusually high market value, strategic managers often decide to sell the firm

• Reasons for divestiture vary

7-345

Liquidation• When liquidation is the grand strategy, the firm

typically is sold in parts, only occasionally as a whole—but for its tangible asset value and not as a going concern

• Planned liquidation can be worthwhile

7-346

Bankruptcy

• Liquidation bankruptcy—agreeing to a complete distribution of firm assets to creditors, most of whom receive a small fraction of the amount they are owed

• Reorganization bankruptcy—the managers believe the firm can remain viable through reorganization

• Two notable types of bankruptcy

7-347

Joint Ventures

• Occasionally two or more capable firms lack a necessary component for success in a particular competitive environment

• The solution is a set of joint ventures, which are commercial companies (children) created and operated for the benefit of the co-owners (parents)

• The joint venture extends the supplier-consumer relationship and has strategic advantages for both partners

7-348

Strategic Alliances• Strategic alliances are distinguished from joint

ventures because the companies involved do not take an equity position in one another

• In some instances, strategic alliances are synonymous with licensing agreements

• Outsourcing arrangements vary

7-349

Consortia, Keiretsus, and Chaebols

• Consortia are defined as large interlocking relationships between businesses of an industry

• In Japan such consortia are known as keiretsus, in South Korea as chaebols

• Their cooperative nature is growing in evidence as is their market success

7-350

Selection of Long-Term Objectives and Grand Strategy

Sets • When strategic planners study their opportunities, they try to

determine which are most likely to result in achieving various long-range objectives

• Almost simultaneously, they try to forecast whether an available grand strategy can take advantage of preferred opportunities so the tentative objectives can be met

• In essence, then, three distinct but highly interdependent choices are being made at one time

Sequence of Selection and Strategy Objectives

• The selection of long-range objectives and grand strategies involves simultaneous, rather than sequential, decisions

• While it is true that objectives are needed to prevent the firm’s direction and progress from being determined by random forces, it is equally true that objectives can be achieved only if strategies are implemented

7-352

Strickland Grand Strategy Selection Model

Strategy Analysis & ChoiceGrand Strategy Matrix

• Popular tool for formulating alternative strategies• Based on two evaluative dimensions

Competitive position Market growth

Grand Strategy Matrix

Quadrant IV• Concentric diversification• Horizontal diversification• Conglomerate diversification• Joint ventures

Quadrant III• Retrenchment• Concentric diversification• Horizontal diversification• Conglomerate diversification• Liquidation

Quadrant I• Market development• Market penetration• Product development• Forward integration• Backward integration• Horizontal integration• Concentric diversification

Quadrant II• Market development• Market penetration• Product development• Horizontal integration• Divestiture• Liquidation

RAPID MARKET GROWTH

SLOW MARKET GROWTH

WEAK COMPETITIVE

POSITION

STRONGCOMPETITIVE

POSITION

Strategy Analysis & ChoiceGrand Strategy Matrix

• Quadrant I Excellent strategic position

Concentration on current markets and products

Take risks aggressively when necessary



• Quadrant II Evaluate present approach seriously

How to change to improve competitiveness

Rapid market growth requires intensive strategy



• Quadrant III Compete in slow-growth industries

Weak competitive position

Drastic changes quickly

Cost and asset reduction indicated (retrenchment)



• Quadrant IV Strong competitive position

Slow-growth industry

Diversification indicated to more promising growth areas

Hofer’s Model

Dimensions

STAGE OF INDUSTRY EVOLUTION

• Early Development

• Rapid Growth/Takeoff

• Shake-Out

• Maturity/Saturation

• Decline/Stagnation

COMPETITIVE POSITION

Life Cycle – Market Evolution Matrix

The business unit competitive positionStrong Average Weak

The Life-Cycle Portfolio Matrix

Development

Growth

Competitive shakeout

Maturity

Decline

Saturation

Th

e I

nd

ustr

y’s

st a

ge in

th

e

evolu

tion

ar y

lif

e c

ycle

Advantages

• Used to identify developing winners

• Illustrates how businesses are distributed across the stages of industry evolution

BCG Matrix

Strategy Analysis & ChoiceBoston Consulting Group Matrix

(BCG)

• Enhances multidivisional firms’ efforts to formulate strategies

• Autonomous divisions (or profit centers) constitute the business portfolio

• Firm’s divisions may compete in different industries requiring separate strategy


(BCG)

• Graphically portrays differences among divisions • Focuses on market share position and industry growth rate• Manage business portfolio through relative market share position

and industry growth rate


(BCG)

• Relative market share position defined:

Ratio of a division’s own market share in a particular industry to the market share held by the largest rival firm in that industry.

BCG Matrix

DogsDogs

IVIVCash CowsCash Cows

IIIIII

Question MarksQuestion Marks

IIStarsStars

IIII

Relative Market Share PositionHigh1.0

Medium.50

Low0.0

Ind

ustry S

ales Grow

th R

ate

High+20

Low-20

Medium0

Strategy Analysis & ChoiceBCG Matrix

• Question Marks • Stars• Cash Cows• Dogs


• Question Marks Low relative market share position yet compete in

high-growth industry. Cash needs are high Case generation is low

Decision to strengthen (intensive strategies) or divest


• StarsHigh relative market share and high industry growth

rate. Best long-run opportunities for growth and profitability

Substantial investment to maintain or strengthen dominant position Integration strategies, intensive strategies, joint ventures


• Cash CowsHigh relative market share position, but compete in

low-growth industry Generate cash in excess of their needs Milked for other purposes

Maintain strong position as long as possible Product development, concentric diversification If becomes weak—retrenchment or divestiture


• DogsLow relative market share position and compete in

slow or no market growth Weak internal and external position

Decision to liquidate, divest, retrenchment

GE Nine Cell Matrix

GE Nine-Cell Matrix

Low

High

Medium

AverageStrong Weak

• Market Size• Growth Rate• Profit Margin• Intensity of Competition• Seasonality• Cyclicality• Resource Requirements• Social Impact• Regulation• Environment• Opportunities & Threats

• Relative Market Share• Reputation/ Image• Bargaining Leverage• Ability to Match Quality/Service

• Relative Costs• Profit Margins• Fit with KSFs

IndustryAttractiveness

Rating Scale: 1 = Weak ; 10 = Strong

6.7

3.3

10.0

1.0

1.03.36.7

Strategy Implications of Attractiveness/Strength Matrix

• Businesses in upper left corner

– Accorded top investment priority

– Strategic prescription is grow and build

• Businesses in three diagonal cells

– Given medium investment priority

– Invest to maintain position• Businesses in lower right corner

– Candidates for harvesting or divestiture

– May be candidates for an overhaul and reposition strategy

The Attractiveness/Strength Matrix

• Allows for intermediate rankings between high and low and between strong and weak

• Incorporates a wide variety of strategically relevant variables

• Stresses allocating corporate resources to businesses with greatest potential for

– Competitive advantage and

– Superior performance

Business Level Strategies

Learning Objectives

1. Determine why a business would choose a low-cost, differentiation, or speed-based strategy

2. Explain the nature and value of a market focus strategy3. Illustrate how a firm can pursue both low-cost and differentiation strategies4. Identify requirements for business success at different stages of industry

evolution5. Determine good business strategies in fragmented and global industries6. Decide when a business should diversify

Levels of Planning at General Electric

Levels and Types of Planning

What Is Business-Level Strategy?

• Business-level strategy– A plan of action to use the firm’s resources and distinctive competencies to

gain competitive advantage.

• Abell’s “Business Definition” process– Customer needs – product differentiation (what)

– Customer groups – market segmentation (who)

– Distinctive competencies – competitive actions (how)

Choosing a Generic Business-Level Strategy

• Product/Market/Distinctive-Competency Choices and Generic Competitive StrategiesCost Leadership Differentiation Focus

ProductDifferentiation

Low(principallyby price)

High(principally by uniqueness)

Low to high(price or uniqueness)

MarketSegmentation

Low(mass market)

High(many market segments)

Low(one or a few segments)

DistinctiveCompetency

Manufacturingand materials management

Research and development, sales and marketing

Any kind of distinctive competency

Choosing a Business-Level Strategy

• Cost-leadership strategy success is affected by:– Competitors producing at equal or lower costs.

– The bargaining strength of suppliers.

– Powerful buyers demanding lower prices.

– Substitute products moving into the market.

– New entrants overcoming entry barriers.

Choosing a Business-Level Strategy• Differentiation strategy success is achieved through:

– An emphasis on product or service quality.

– Innovation in providing new features for which customers will pay a premium price.

– Responsiveness to customers after the sale.

– Appealing to the psychological desires of customers.

Choosing a Business-Level Strategy• Differentiation strategy success is affected by:

– Competitors imitating features and services.

– Increases in supplier costs exceeding differentiator’s price premium.

– Buyers becoming less brand loyal.

– Substitute products adding similar features.

– New entrants overcoming entry barriers related to differentiator’s competitive advantage.

Choosing a Business-Level Strategy• Focus strategy success is affected by:

– Competitor entry into focuser’s market segment.

– Suppliers capable of increasing costs affecting only the focuser.

– Buyers defecting from market segment.

– Substitute products attracting customers away from focuser’s segment.

– New entrants overcoming entry barriers that are the source of the focuser’s competitive advantage.

Strategic Groups and Business-Level Strategy

• Implications for business-level strategy– Immediate competitors are companies pursuing same strategy within the same

strategic group.– Different strategic groups can have a different standing with respect to the

effects of the five competitive forces.

• First mover advantage– Benefits are first choice of customers and suppliers, setting standards,

building entry barriers.

Choosing an Investment Strategy at the Business Level

• Investment strategy– The resources (human, functional, and financial) required to gain sustainable

competitive advantage.

• Competitive position– Market share is an indicator of competitive strength.– Distinctive competencies are competitive tools.

• Life Cycle Effects– An industry’s life cycle stage affects its attractiveness to investment prospects.

Choosing an Investment Strategy at the Business Level

•Stage of the Industry Life Cycle

•Strong CompetitivePosition

•Weak CompetitivePosition

•Embryonic •Share building •Share building

•Growth •Growth •Market concentration

•Shakeout •Share increasing •Market concentration or harvest/liquidation

•Maturity •Hold-and-maintain or profit •Harvest or liquidation/divestiture

•Decline •Market concentration or harvest (asset reduction)

•Turnaround, liquidation,or divestiture

Evaluating and Choosing Business Strategies: Seeking Sustained Competitive

Advantage

• The two most prominent sources of competitive advantage can be found in the business’s cost structure and its ability to differentiate the business from competitors

• Businesses that have one or more sources/capabilities that let them

operate at a lower cost will

consistently outperform their

rivals that don’t

Evaluating Cost Leadership Opportunities

• Business success built on cost leadership requires the business to be able to provide its product or service at a cost below what its competitors can achieve

Sustainable Low-Cost Activities

1. Some low-cost advantages reduce the likelihood of buyers’ pricing pressure

2. Truly sustained low-cost advantages may push rivals into other areas

3. New entrants competing on price must face an entrenched cost leader

4. Low-cost advantages should lessen the attractiveness of substitute products

Sustainable Low-Cost Activities

1. Higher margins allow low-cost producers to withstand supplier cost increases

2. Many cost-saving activities are easily duplicated

3. Exclusive cost leadership can be a trap

4. Obsessive cost cutting can shrink other competitive advantages

5. Cost differences often decline over time

Evaluating Differentiation

• Differentiation requires that the business have sustainable advantages that allow it to provide buyers with something uniquely valuable to them

• Differentiation usually arises from one or more activities in the value chain that create a unique value important to buyers

• Strategists use benchmarking and consider the 5 forces in considering differentiation

Evaluating Speed as a Competitive Advantage

• Speed-based strategies, or rapid response to customer requests or market and technological changes, have become a major source of competitive advantage for numerous firms in today’s intensely competitive global economy

Speed can be created by:

• Customer responsiveness

• Product development cycles

• Product or service improvements

• Speed in delivery or distribution

• Information Sharing and Technology

Risks of Speed-based Strategy

• Speeding up activities that haven’t been conducted in a fashion that prioritizes rapid response should only be done after considerable attention to training, reorganization, and/or reengineering

• Some industries may not offer much advantage to the firm that introduces some forms of rapid response

• Customers in such settings may prefer the slower pace or the lower costs currently available, or they may have long time frames in purchasing

Evaluating Market Focus as a Way to Competitive Advantage

• Market focus: the extent to which a business concentrates on a narrowly defined market

• Small companies, at least the better ones, usually thrive because they serve narrow market niches

• Market focus allows some businesses to compete on the basis of low cost, differentiation, and rapid response against much larger businesses with greater resources

Risks of Market Focus• The risk of focus is that you attract major competitors

who have waited for your business to “prove” the market • Managers evaluating opportunities to build competitive

advantage should link strategies to • Resources• Capabilities• Value chain activities that exploit low cost, differentiation, and

rapid response

Stages of Industry Evolution and Business Strategy Choices

• The requirements for success in industry segments change over time

• Strategists can use these changing requirements, which are associated with different stages of industry evolution, as a way to isolate key competitive advantages and shape strategic choices around them

Emerging Industries

• Emerging industries are newly formed or re-formed industries that typically are created by technological innovation, newly emerging customer needs, or other economic or sociological changes

• There are no “rules of the game”

Business Strategies in Emerging Industries

• Technologies that are most proprietary to the pioneering firms and technological uncertainty will unfold

• Competitor uncertainty because of inadequate information about competitors, buyers, and the timing of demand

• High initial costs but steep cost declines

• Few entry barriers

• First-time buyers requiring initial inducement to purchase

• Inability to obtain raw materials and components until suppliers gear up to meet the industry’s needs

• Need for high-risk capital because of the industry’s uncertain prospects

Emerging Industries

• For success in this industry setting, business strategies require one or more of these features:

• The ability to shape the industry’s structure • The ability to rapidly improve product quality and performance features • Advantageous relationships with key suppliers and promising distribution channels • The ability to establish the firm’s technology as the dominant one• The early acquisition of a core group of loyal customers and then the expansion of that

customer base • The ability to forecast future competitors

Competitive Advantages and Strategic Choices in Growing Industries

• Rapid growth brings new competitors into the industry

• At this stage, growth industry strategies that emphasize brand recognition, product differentiation, and the financial resources to support both heavy marketing expenses and the effect of price competition on cash flow can be key strengths

Growth Industries• For success in this industry setting, business strategies require one or more of the following

features:

– The ability to establish strong brand recognition

– The ability and resources to scale up to meet increasing demand

– Strong product design skills to be able to adapt products and services

– The ability to differentiate the firm’s product[s] from competitors entering the market

– R&D resources and skills to create product variations

– The ability to build repeat buying from established customers

– Strong capabilities in sales and marketing

Competitive Advantages and Strategic Choices in Mature Industries

• As an industry evolves, its rate of growth eventually declines

• Firms working with the mature industry strategies sell increasingly to experienced, repeat buyers who are now making choices among known alternatives

• Competition becomes more

oriented to cost and service

as knowledgeable buyers

expect similar price and features

Mature Industries• Strategy elements of successful firms in maturing industries often include the following: • Product line pricing• Emphasis on process innovation that

permits low-cost product design, manufacturing methods, and distributionsynergy

• Emphasis on cost reduction • Careful buyer selection to focus on

buyers who are less aggressive, more closely tied to the firm, and able to buy more from the firm

• Horizontal integration to acquire rival firms whose weaknesses can be used to gain a bargain price• International expansion to markets where attractive growth and limited competition still exist

Competitive Advantages and Strategic Choices in Declining Industries

• Declining industries are those that make products or services for which demand is growing slower than demand in the economy as a whole or is actually declining

• Focus on higher growth

or a higher return

• Emphasize product innovation

and quality improvement

• Emphasize production and

distribution efficiency

• Gradually harvest the business

Competitive Advantage in Fragmented Industries

• A fragmented industry is one in which no firm has a significant market share and can strongly influence industry outcomes

• Tightly managed decentralization

• “Formula” facilities

• Increased value added

• Specialization

• Bare bones/no frills

Competitive Advantage in Global Industries

• A global industry is one that comprises firms whose competitive positions in major geographic or national markets are fundamentally affected by their overall global competitive positions

– License foreign firms to produce and distribute the firm’s products

– Maintain a domestic production base and export products to foreign countries

– Establish foreign-based plants and distribution to compete directly in the markets of one or more foreign countries

Four Generic GlobalCompetitive Strategies

• Broad-line global competition

• Global focus strategy

• National focus strategy

• Protected niche strategy

Grand Strategy Selection Matrix

Model of Grand Strategy Clusters

Building Value as a Basis for Choosing Diversification or Integration

• The grand strategy selection matrix and model of grand strategy clusters are useful tools to help dominant product company managers evaluate and narrow their choices among alternative grand strategies

• Dominant product company managers who choose diversification or integration eventually create another management challenge

Industry Scenarios• An industry scenario is a useful mechanism to understand the

strategic implications of uncertainty. • A scenario is an internally consistent view of what the future might

turn out to be.• Allow a firm to move away from dangerous single-point forecast of

the future in instances where the future cannot be predicted. • Can help encourage managers to make their implicit assumptions

about the future explicit and to think beyond the confines of existing conventional wisdom.

Industry Scenarios (Cont…)

• The firm can then make well informed choices about how to take the competitive uncertainties it faces into account.

• The process involves determining the major uncertainties and the key causal factors that will drive them.

• Uncertainties are placed in one of three categories: constant, predetermined, and uncertain.

• The uncertain ones are the critical ones. They can be listed under the same five key competitive factors : entry barriers, buyers, rivalry, substitutes and suppliers.

Example: Industry Scenario Pharmaceutical Industry

Industry Scenarios (Cont…)

• A major purpose of industry scenarios is to ensure an internal consistency in the firm's view of the future.

• Having developed and analyzed the set of scenarios, the net task is to formulate competitive strategy

COMPETITIVE STRATEGIES

The objective of competitive strategy is to knock the socks of rival companies by doing a significant

better job of providing what buyers are looking for

V-C FrameworkValue

Price

Cost

Buyer’s Surplus

Firm’s Profit

The Firm’s Economic Contribution

Strategy and Competitive Advantage

• Competitive advantage exists when a firm’s strategy gives it an edge in

– Attracting customers and

– Defending against competitive forces

• Convince customers firm’s product / service offers superior value

– A good product at a low price

– A superior product worth paying more for

– A best-value product

Key to Gaining a Competitive Advantage

What Is“Competitive Strategy”?

• Deals exclusively with a company’sbusiness plans to compete successfully

– Specific efforts to please customers

– Offensive and defensive movesto counter maneuvers of rivals

– Responses to prevailing market conditions

– Initiatives to strengthen its market position

• Narrower in scope than business strategy

Any competitive advantage currently held will eventually be eroded by

the actions of competent, resourceful competitors!

Time

Size ofC. Ad.

BuildUp

BenefitPeriod

Erosion

Moves calculated to yield a competitive advantage

Offensive Vs Defensive Moves• Competitive strategies: strategic moves multinationals use to defeat competitors

- Offensive competitive strategies: direct attacks to capture market share (Nearly always result in successful achievement of competitive advantage )

- Defensive competitive strategies: attempts to discourage offensive strategies (Can protect competitive advantage, but RARELY are the basis for achieving competitive advantage )

- Counter-parry: fending off a competitor’s attack in one country by attacking in another country

Examples of Offensive Strategies

• Direct attacks: price cutting, adding new features, or going after poorly served markets

• End-run offensives: seeking unoccupied markets

• Preemptive competitive strategies: being first to obtain particular advantageous position

• Acquisitions: buying out a competitor

Types of Strategic Offensive

1. Match / exceed competitive strengths

2. Capitalise on Weaknesses

3. Simultaneous initiatives on many fronts

4. End-run offensives

5. Guerilla offensives

6. Preemptive strikes

Appeal

• Gain market share by out-matching strengths of weaker rivals

• Whittle away at a rival’s competitive advantage

• Challenging strong competitors with a lower price is foolhardy unless aggressor has a COST ADVANTAGE or advantage of GREATER FINANCIAL STRENGTH!

ATTACKING COMPETITOR STRENGTHS

Possible Offensive Options• Offer equally good product at a lower price

• Develop low-cost edge, then use it to under-price rivals

• Leapfrog into next-generation technologies

• Add appealing new features

• Run comparison ads

• Construct new plant capacity in rival’s market strongholds

• Offer a wider product line

• Develop better customer service capabilities

ATTACKING COMPETITOR STRENGTHS

Basic Approach• Concentrate one’s competitive strengths & resources directly against

rivals’ weaknesses

Weaknesses to Attack• Concentrate on geographic regions where rival has weak market share • Go after buyer segments rival is neglecting • Go after more performance-conscious customers of rivals who lag behind

challenger • Attack rivals with weaker advertising & brand recognition

ATTACKING COMPETITOR Weaknesses

COMPETITIVE STRATEGY PRINCIPLE

Challenging rivals where they are most vulnerable is more likely to succeed than

challenging them where they are strongest, ESPECIALLY when challenger possesses

competitive advantage in areas where rivals are weak!

Objective• Launch several major initiatives to

– Throw rival off-balance, – Splinter its attention in many directions, and – Force it to use substantial resources to defend its position

Appeal• A challenger with superior resources can overpower a weaker rival

by outspending it across-the-board long enough to “buy its way into the market”

LAUNCHING OFFENSIVES ON MANY FRONTS

Objective• DODGE head-to-head confrontations that escalate competitive

intensity and RISK cutthroat competition -- Attempt to MANEUVER AROUND competition

Appeal• Gain first-mover advantage in a new arena • Force competitors into playing catch up • Change rules of competition in aggressor’s favor

END-RUN OFFENSIVES

END-RUN OFFENSIVES: APPROACHES

• Move aggressively into new geographic markets where rivals have no market presence

• Introduce products with different attributes & features to better meet buyer needs

• Introduce next-generation technologies & leapfrog rivals

• Come up with more support services for customers

Approach• Use principles of surprise & hit-and-run to attack in

locations & at times where conditions are most favorable to initiator

Appeal• Well-suited to small challengers with limited

resources

GUERRILLA OFFENSES

GUERRILLA OFFENSES: OPTIONS• Focus on narrow target weakly defended by rivals • Challenge rivals where they are overextended & when they

are encountering problems • Make random scattered raids on leaders with tactics such as

– Occasional low-balling on price – Intense bursts of promotional activity – Legal actions charging antitrust violations, patent infringements,

& unfair advertising

PREEMPTIVE STRIKES

Approach

• Involves moving first to secure an advantageous position that rivals are foreclosed or discouraged from duplicating!

PREEMPTIVE STRIKES: OPTIONS• Expand capacity ahead of demand in hopes of discouraging rivals

from following suit • Tie up best or cheapest sources of essential raw materials • Move to secure best geographic locations • Obtain business of prestigious customers • Build an image in buyers’ minds that is unique & hard to copy • Secure exclusive or dominant access to best distributors • Acquire desirable, but struggling, competitor

Choosing whom to attack?

•Market leaders •Runner-up firms

•Struggling rivals on verge of going under •Small local/regional firms with limited

capabilities

OFFENSIVE STRATEGY & COMPETITIVE ADVANTAGE

• Competitive advantage areas offering strongest basis for a STRATEGIC OFFENSIVE

• Develop lower-cost product design • Make changes in production operations that lower costs or enhance differentiation • Develop product features that deliver superior performance or lower users’ costs • Give more responsive customer service • Escalate marketing effort • Pioneer new distribution channel • Sell direct to end-users

Chances for strategic success are improved when offensive is tied to what

firm does best:Key skill

Strong functional competence

• Fundamental Principles (Offence)There are four fundamental principles involved:1) Assess the strength of the target competitor. Consider the amount of support that the

target might muster from allies. Choose only one target at a time.2) Find a weakness in the target’s position. Attack at this point. Consider how long it will

take for the target to realign their resources so as to reinforce this weak spot.3) Launch the attack on as narrow a front as possible. Whereas a defender must defend all

their borders, an attacker has the advantage of being able to concentrate their forces at one place.

4) Launch the attack quickly. The element of surprise is worth more than a thousand tanks.

Offensive marketing Strategies

Types of Offensive Strategies• Frontal Attack – • This is a direct head-on assault. It usually involves marshaling all

your resources including a substantial financial commitment. • All parts of your company must be geared up for the assault from

marketing to production. • It usually involves intensive advertising assaults and often entails

developing a new product that is able to attack the target competitors’ line where it is strong.

• It often involves an attempt to “liberate” a sizable portion of the target’s customer base.

In actuality, frontal attacks are rare. There are two reasons for this. • Firstly, they are expensive. Many valuable resources will be used and lost in the

assault. • Secondly, frontal attacks are often unsuccessful. If defenders are able to re-deploy

their resources in time, the attacker’s strategic advantage is lost. You will be confronting strength rather than weakness.

• Also, there are many examples (in both business and warfare) of a dedicated defender being able to hold-off a larger attacker. The strategy is suitable when – the market is relatively homogeneous– brand equity is low– customer loyalty is low– products are poorly differentiated– the target competitor has relatively limited resources– the attacker has relatively strong resources

Envelopment Strategy (also called encirclement strategy) – • This is a much broader but subtle offensive strategy. • It involves encircling the target competitor. • This can be done in two ways. • You could introduce a range of products that are similar to the target product. Each

product will liberate some market share from the target competitor’s product, leaving it weakened, demoralized, and in a state of siege. If it is done stealthily, a full scale confrontation can be avoided.

• Alternatively, the encirclement can be based on market niches rather than products. The attacker expands the market niches that surround and encroach on the target competitor’s market. This encroachment liberates market share from the target. The envelopment strategy is suitable when: – the market is loosely segmented– some segments are relatively free of well endowed competitors– the attacker has strong product development resources– the attacker has enough resources to operate in multiple segments simultaneously– the attacker has a decentralized organizational structure

• Pepsodent, launched in 1993, was the first toothpaste with a unique anti-bacterial agent to address the consumer need of checking germs even hours after brushing.

• Pepsodent packs included a Germ Indicator in February-May 2002, which allowed consumers to see the efficacy in fighting germs for themselves. As a follow-up, in October 2002, Pepsodent offered Dental Insurance to all its consumers to demonstrate the confidence the company has in the technical superiority of the product.

• Pepsodent connects directly with kids and their parents. Pepsodent has always worked in the direction of an overall awareness of dental health. The relaunch campaign in October 2003 widened the context to "sweet and sticky" food and leveraged the truth that children do not rinse their mouths every time they eat, demonstrating that this makes their teeth vulnerable to germ attack.

• Pepsodent's most recent campaign aims at educating consumers on the need for germ protection through the night.

• Pepsodent also includes a range of toothbrushes

Colgate has developed a powerful Branding Strategy which has significantly helped the Brand in acquiring substantial amount of share in the oral care market of India. In order to strengthen its' Brand Identity, Colgate is still restructuring its Branding Strategy.

Colgate Branding Strategy was strong enough to position the company as a major brand in the oral care market of India.

The Brand Colgate emerged as a market leader as it bagged considerable amount of market share in all the segments of oral care market like toothpaste segment, tooth powder segment and toothbrush segment.

Colgate has succeeded in establishing its Brand Image and gaining substantial market share in spite of facing tough competition from the brands like Hindusthan Liver, Babool and Anchor.

Still the Brand Colgate is continuously updating and improving its' branding strategy in order to strengthen its' Brand Name and Brand Identity.

The future Branding Strategy of Colgate may comprise the following steps and actions: • For maintaining the Brand Equity in the market, every company requires a system of

continuous growth and upgradation . So, in order to develop new products, Colgate may give emphasis on Research and Development Projects.

• The Brand Strategy of Colgate also aims at reaching to the rich and consuming customers of rural India by introducing some Ayurvedic Oral Care Products.

• In order to strengthen its' Brand Image in the urban market of India, Colgate may launch some oral care products specifically targeting the urban youth and the urban rich class.

• Colgate Branding Strategy aims at introducing some special oral care products which will focus on functional benefits. The Brand can launch specific oral care products for different age groups.

• The Branding Strategy of Colgate also plans to customize its packaging techniques, based on price points. This, in a way will establish a new pricing strategy.

• Colgate Branding Strategy has a objective strengthening its' business promotion network. The company is undertaking advertising strategies and campaigning programs with the objective of reaching to the customers of India across income classes

Colgate Toothpaste Product Line

Colgate Dental Cream Colgate Total 12Colgate SensitiveColgate Max FreshColgate Kids ToothPasteColgate Fresh Energy GelColgate HerbalColgate Cibaca Family ProtectionColgate Advanced WhiteningColgate Active Salt

Pepsodent Toothpaste Product Line

Pepsodent Complete + Gum Care Complete 12 Pepsodent Herbal Pepsodent Milk Teeth Orange Pepsodent Milk Teeth Strawberry Pepsodent Sensitive Pepsodent Whitening

• Leapfrog strategy –• This strategy involves bypassing the enemy’s forces altogether. • In the business arena, this involves either developing new

technologies, or creating new business models. • This is a revolutionary strategy that re-writes the rules of the game. • The introduction of compact disc technology bypassed the

established magnetic tape based defenders. The attackers won the war without a single costly battle.

• This strategy is very effective when it can be realized.

Flanking attack –

• This strategy is designed to pressure the flank of the enemy line so the flank turns inward.

• You make gains while the enemy line is in chaos. In doing so, you avoid a head-on confrontation with the main force

Defensive StrategiesObjectives• Lessen risk of being attacked • Blunt impact of any attack that occurs • Influence challengers to aim attacks at other rivals • Strengthen firm’s present position • Help sustain any competitive advantage held

DEFENSIVE STRATEGIES: APPROACHES

Approach #1

• Block avenues challengers can take in mounting offensive attacks

Approach #2

• Make it clear any challenge will be met with strong counterattack

DEFENSIVE STRATEGIES: APPROACH #1

• Broaden product line to fill gaps rivals may go after

• Keep prices low on models that match rivals

• Sign exclusive agreements with distributors

• Offer free training to buyers’ personnel

• Give better credit terms to buyers

• Reduce delivery times for spare parts

• Increase warranty coverages

• Patent alternative technologies

• Sign exclusive contracts with best suppliers

• Protect proprietary know-how

DEFENSIVE STRATEGIES: APPROACH #2• Publicly announce management’s strong commitment to maintain present

market share • Publicly announce plans to construct new production capacity to meet forecasted

demand • Give out advance information about new products, technological breakthroughs,

& other moves • Publicly commit firm to policy of matching prices & terms offered by rivals • Maintain war chest of cash reserves • Make occasional counter-responses to rivals’ moves

Defensive Marketing Strategies

Fundamental principles (Defence)• There are five fundamental principles involved:1) Always counter an attack with equal or greater force.2) Defend every important market.3) Be forever vigilant in scanning for potential attackers. Assess the strength

of the competitor. Consider the amount of support that the attacker might muster from allies.

4) The best defense is to attack yourself. Attack your weak spots and rebuild yourself anew.

5) Defensive strategies should be the exclusive domain of the market leader.

Types of Defensive Strategies• Position defense – • This involves the defense of a fortified position. • This tends to be a weak defense because you become a “sitting duck”. It can

lead to a siege situation in which time is on the side of the attacker, that is, as time goes by the defender gets weaker, while the attacker gets stronger.

• In a business context, this involves setting up fortifications such as barriers to market entry around a product, brand, product line, market, or market segment. This could include increasing brand equity, customer satisfaction, customer loyalty, or repeat purchase rate. It could also include exclusive distribution contracts, patent protection, market monopoly, or government protected monopoly status. It is best used in homogeneous markets where the defender has dominant market position and potential attackers have very limited resources.

• Mobile defense – • This involves constantly shifting resources and developing new strategies

and tactics. • A mobile defense is intended to create a moving target that is hard to

successfully attack, while simultaneously, equipping the defender with a flexible response mechanism should an attack occur.

• In business this would entail introducing new products, introducing replacement products, modifying existing products, changing market segments, changing target markets, repositioning products, or changing promotional focus. This defense requires a very flexible organization with strong marketing, entrepreneurial, product development, and marketing research skills.

• Flank position - This involves the re-deployment of your resources to deter a flanking attack. You protect against potential loss of market share in a segment, by strengthening your competitive position in this segment with new products and other tactics. (see flanking marketing warfare strategies)

• Counter offensive - This involves countering an attack with an offense of your own. If you are attacked, retaliate with an attack on the aggressor’s weakest point.

Counter-parry

• Popular strategy for multinationals

• Respond to attack by attacking competitor in another country– Ex.: Kodak—When Fuji attacked Kodak in the U.S.,

Kodak retaliated by attacking Fuji in Japan.

– Goodyear also attacked Michelin in Europe as response to attack in U.S.

Strategies forUsing the Internet

• Strategic Challenge – What use of the Internet should a company make in staking out its position in the marketplace?

• Five Approaches

– Use company web site solely to disseminate product information

– Use company web site as a minor distributionchannel for accessing customers and generating sales

– Use company web site as one of several importantdistribution channels for accessing customers

– Use company web site as primary distributionchannel for accessing buyers and making sales

– Use company web site as the exclusive channelfor accessing buyers and conducting sales transactions

Using the Internet toDisseminate Product Information

• Approach – Website used to provide product information of manufacturers or wholesalers – Relies on click-throughs to websites of

dealers for sales transactions

– Informs end-users of location of retail stores

• Issues – Pursuing online sales may– Signal weak strategic commitment to dealers

– Signal willingness to cannibalize dealers’ sales

– Prompt dealers to aggressively market rivals’ brands

• Avoids channel conflict with dealers – Important where strong support of dealer networks is essential

Using the Internet as aMinor Distribution Channel

• Approach – Use online sales to

– Achieve incremental sales

– Gain online sales experience

– Conduct marketing research

• Learn more about buyer tastes and preferences

• Test reactions to new products

• Create added market buzz about products

• Unlikely to provoke much outcry from dealers

Brick-and-Click Strategies: An Appealing Middle Ground Approach

• Approach

– Sell directly to consumers and

– Use traditional wholesale/retail channels

• Reasons to pursue a brick-and-click strategy

– Manufacturer’s profit margin from online sales is bigger than that from sales through traditional channels

– Encouraging buyers to visit a firm’s website educates them to the ease and convenience of purchasing online

– Selling directly to end users allows a manufacturer to make greater use of build-to-order manufacturing and assembly

Strategies for Online Enterprises

• Approach – Use Internet as the exclusivechannel for all buyer-seller contact and transactions

• Success depends on a firm’s abilityto incorporate following features– Capability to deliver unique value to buyers

– Deliberate efforts to engineer a value chain that enables differentiation, lower costs, or better value for the money

– Innovative, fresh, and entertaining website

– Clear focus on a limited number of competencies and a relatively specialized number of value chain activities

– Innovative marketing techniques

– Minimal reliance on ancillary revenues

VERTICAL INTEGRATION STRATEGIES

• Vertical integration extends a firm’s competitive scope within same industry – BACKWARD into sources of supply

– FORWARD toward end-users of final product

• Moves to vertically integrate can aim at becoming – FULLY INTEGRATED

– PARTIALLY INTEGRATEDA vertical integration strategy has appeal ONLY if it significantly strengthens a firm’s competitive

position!

APPEAL OF BACKWARD INTEGRATION

• Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers

• Cost savings potential is strongest when – Suppliers have sizable profit margins – Item being supplied is a major cost component – Necessary technical skills are easily mastered

• A differentiation-based competitive advantage arises when firm ends up with a better quality part

• Spares firm uncertainty of depending on suppliers of crucial raw materials

APPEAL OF FORWARD INTEGRATION

• Advantageous for firm to set up its own wholesale-retail distribution network if – Undependable distribution channels undermine steady production

operations• Integration into distribution & retailing may be cheaper than

going through independent distributors • May help achieve greater product differentiation, allowing

escape from price-oriented competition • For manufacturer, may provide better access to ultimate

consumer

STRATEGIC DISADVANTAGES OF VERTICAL INTEGRATION

• Boosts capital requirements • Results in fixed sources of supply & less flexibility in accommodating

buyer demands for product variety • Extends firm’s scope of activity, locking it deeper into industry • Poses problems of balancing capacity at each stage of value chain • Requires radically different skills & capabilities • Can reduce firm’s manufacturing flexibility, lengthening design time &

ability to introduce new products

UNBUNDLING & OUTSOURCING STRATEGIES

Involves withdrawing from certain stages in value chain system and relying on outside vendors to

perform needed activities and services

ADVANTAGES OF OUTSOURCING STRATEGIES• Activity can be performed better or more cheaply by outside

specialists • Activity is not crucial to achieving competitive advantage • Reduces firm’s risk exposure to changing technology and/or

changing buyer preferences • Streamlines firm operations in ways to

– Cut cycle time – Speed decision-making – Reduce coordination costs

• Allows firm to concentrate on its core business

PROS & CONS OF VERTICAL INTEGRATION

• Use of a vertical integration strategy depends on

• If it can enhance performance of strategy-critical activities to EITHER – Lower costs OR

– Increase differentiation

• Impact on – Investment costs

– Flexibility & response times

– Administrative overhead of coordination

• If a competitive advantage can be created

FIRST-MOVER ADVANTAGES

• WHEN to make a strategic move is often as crucial as WHAT move to make

• First-mover advantages arise WHEN – Pioneering helps build firm’s image & reputation

– Early commitments to raw material suppliers, new technologies, & distribution channels can produce cost advantage

– Loyalty of first time buyers is high

– Moving first can be a preemptive strike

FIRST-MOVER DISADVANTAGESArise WHEN

• Costs of pioneering are sizable & loyalty of first time buyers is weak

• Rapid technological change allows followers to leapfrog pioneers

• Skills & know-how of pioneers are easily imitated by late movers

• It is easy for latecomers to crack market

Timing of Strategic MovesAdvantages / disadvantages of First Mover

+ if pioneering helps build brand image+ if early contracts with suppliers etc advantageous

+ first time customer loyalty+ makes imitation harder

- expense- rapid change may lead to obsoletion

- weak customer loyalty- easily imitated

Operationalizing and

Institutionalizing Strategy

Roadmap• A Framework for Executing Strategy

• The Principal Managerial Components of the Strategy Execution Process

• Building a Capable Organization

• Staffing the Organization

• Building Core Competencies and Competitive Capabilities

• Matching Organization Structure to Strategy

• Organizational Structures of the Future

Crafting vs. Executing Strategy

Crafting the Strategy• Primarily a market-driven activity• Successful strategy making

depends on– Business vision– Perceptive analysis of market

conditions and company resources and capabilities

– Attracting and pleasing customers– Outcompeting rivals– Using company resources and

capabilities to forge a competitive advantage

Executing the Strategy• Primarily an operations-driven

activity• Successful strategy execution

depends on– Good organization-building and

people management– Creating a strategy-supportive

culture– Continuous improvement– Getting things done and delivering

good results

Executing the Strategy• An action-oriented, make-things happen task involving management’s

ability to

– Direct organizational change

– Achieve continuous improvement inoperations and business processes

• Move toward operating excellence

– Create and nurture astrategy-supportive culture

– Consistently meet or beat performance targets

• Tougher and more time-consuming than crafting strategy

Implementation involves . . .

Why Executing Strategy Is aTough Management Job

• The demanding variety of managerialactivities to be performed

• Numerous ways to tackle each activity

• Requires good people management skills

• Requires launching and managinga variety of initiatives simultaneously

• Number of bedeviling issues to be worked out

• Battling resistance to change

• Hard to integrate efforts of many different work groups into a smoothly-functioning whole

Implementing a Newly Chosen Strategy Requires Adept Leadership

• Implementing a new strategytakes adept leadership to

– Convincingly communicatereasons for the new strategy

– Overcome pockets of doubt

– Build consensus and enthusiasm

– Secure commitment of concerned parties

– Get all implementation pieces in place and coordinated

Who Are theStrategy Implementers?

• Implementing and executing strategy involves a company’s whole management team and all employees– Just as every part of a watch plays a role in making the watch function properly,

it takes all pieces of an organization working cohesively for a strategy to be well-executed

• Top-level managers must lead the processand orchestrate major initiatives– But they must rely on the cooperation of

• Middle and lower-level managers to see that things go well in the various parts of the organization and

• Employees to perform their roles competently on a daily basis

What Are the Goals of the Strategy Implementing-Executing Process?

• Unite total organization behind strategy

• See that activities are done in a manner that is conducive to first-rate strategy execution

• Generate commitment so an enthusiasticcrusade emerges to carry out strategy

• Fit how organization conducts itsoperations to requirements of strategy

Characteristics of the Strategy Implementation Process

• Every manager has an active role

• No proven “formula” for implementing particular types of strategies

• There are guidelines, but no absolute rules and “must do it this way” rules

• Many ways to proceed that are capable of working

• Cuts across many aspects of “how to manage”

Characteristics of the Strategy Implementation Process (continued)

• Each implementation situation occurs in a different context, affected by differing

– Business practices and competitive situations

– Work environments and cultures

– Policies

– Compensation incentives

– Mix of personalities and firm histories

• Approach to implementation/execution has be customized to fit the situation

• People implement strategies - Not companies!

What Top Executives Have to Do inLeading the Implementation Process

• Communicate the case for change

• Build consensus on how to proceed

• Install strong allies in areas where they can push implementation along in key business units

• Empower subordinates to keep process moving

• Establish measures of progress and deadlines

• Reward those who achieveimplementation milestones

• Direct resources to the right places

• Personally lead the strategic change process and the drive for operating excellence

The Three Components of Building a Capable Organization

Putting Together a Strong Management Team

• Assembling a capable management team is a cornerstone of the organization-building task

• Find the right people to fill each slot

– Existing management teammay be suitable

– Core executive groupmay need strengthening

• Promote from within

• Bring in skilled outsiders

Selecting the Management Team: Key Considerations

• Determine mix of

– Backgrounds

– Experiences and know-how

– Beliefs and values

– Styles of managing and personalities

• Personal chemistry must be right

• Talent base needs to be appropriate

• Picking a solid management team needs to be acted on early in implementation process

Recruiting and Retaining Talented Employees: Implementation Issues

• Assemble needed human resources and knowledge base for effective strategy execution

• Biggest challenge facing companies

– How to recruit and retain the bestand brightest talent with strongskill sets and management potential

• Intellectual capital, not tangible assets, is increasingly being viewed as the most important investment

– Talented people are a prime source of competitive advantage

Key Human Resource Practices toAttract and Retain Talented Employees

• Spend considerable effort in screening job applicants, selecting only those with – Suitable skill sets

– Energy and initiative

– Judgment and aptitudes for learning

– Ability to adapt to firm’s work environment and culture

• Put employees through training programs throughout their careers

• Give promising employees challenging, interesting, and skills-stretching assignments

• Rotate employees through jobs with great content, spanning functional and geographic boundaries

• Encourage employees to– Be creative and innovative

– Challenge existing ways of doing things and offer better ways

– Submit ideas for new products or businesses

• Foster a stimulating work environment

• Exert efforts to retain high-potential employees with excellent salary and benefits

• Coach average employees to improve their skills

Key Human Resource Practices to Attractand Retain Talented Employees (continued) Key Human Resource Practices to Attractand Retain Talented Employees (continued)

Building Core Competencesand Competitive Capabilities

• Crafting the strategy involves

– Identifying the desired competences and capabilities to build into the strategy and help achieve competitive advantage

• Good strategy execution requires

– Putting desired competences and capabilities in place,

– Upgrading them as needed, and

– Modifying them as marketconditions evolve

Strategically-Relevant Competences

• Greater proficiency in product development

• Better manufacturing know-how

• Capability to provide better after-sale service

• Faster response to changing customer needs

• Superior cost-cutting skills

• Capacity to speed new products to market

• Superior inventory management systems

• Better marketing and merchandising skills

• Specialized depth in unique technologies

• Greater effectiveness in promotingunion-management cooperation

Expertise in gasoline enginetechnology and small engine design

Three-Stage Process of Developing Competences and Capabilities

1. Develop ability to do something

2. As experience builds,ability can translate into acompetence or capability

3. If ability continues to be polished and refined, it can become a distinctive competence, providing a potential competitive advantage!

Step 1 in Developing Competences

• Develop ability to do something

– Select people with relevant skills/experience

– Broaden or expand individual abilities as needed

– Mold efforts and work products ofindividuals into a cooperative effortto create organizational ability


• As experience builds and company learns how to perform the activity consistently well and at acceptable cost, the ability evolves into a competence or capability

• Typically, a capability or competence emerges from establishing and nurturing collaborative relationships between– Individuals and groups in different departments and/or – A company and its external allies


• If company masters the activity, performing it better than rivals, the “capability” or “competence” becomes a

– Distinctive competence and

– Holds potential forcompetitive advantage

This is the optimal outcome of the process of building capabilities-competences!

Managing the Process of Building Competences: Four Key Traits

1. Competencies are bundles of skills and know-how growing from combined efforts of cross-functional departments

2. Normally, competences emerge incrementally from various company efforts to respond to market conditions

3. Leveraging competences into competitive advantage requires concentrating more effort and talent than rivals on strengthening competences to create valuable capabilities

4. Sustaining competitive advantage requires adjusting competences to new conditions

Approaches toDeveloping Competences

• Internal development involves either– Strengthening the company’s base of skills, knowledge, and intellect or

– Coordinating and networking the effortsof various work groups and departments

• Partnering with key suppliers,forming strategic alliances, or maybe even outsourcing certain activities to specialists

• Buying a company that has the required capabilities and integrating these competences into the firm’s value chain

Building Competences:Keys to Success

• Selecting capable employees

• Training

• Cultural influences and peer pressures

• Cross-department cooperation and collaboration

• Motivating employees to strive for operating excellence

• Empowerment

• Attractive incentives

• Organizational flexibility

• Short deadlines

• Good databases

Updating Competences andCapabilities as Conditions Change

• Competences and capabilities mustcontinuously be modified and perhapseven replaced with new ones due to

– New strategic requirements

– Evolving market conditions

– Changing customer expectations

• Ongoing efforts to keep core competences up-to-date can provide a basis for sustaining both

– Effective strategy execution and

– Competitive advantage

When it is difficult to outstrategize rivals with a superior strategy . . .

. . . Best avenue to industry leadership is to out-compete rivals with superior strategy execution!

Building competences and capabilitiesrivals can’t match is one of the

best ways to out-compete them!

Strategic Role ofEmployee Training

• Training plays a critical role in implementation when a firm shifts to a strategy requiring different– Skills or core competences

– Competitive capabilities

– Managerial approaches

– Operating methods

• Types of training approaches– Internal “universities”

– Orientation sessions for new employees

– Tuition reimbursement programs

– Online training courses

Matching OrganizationStructure to Strategy

• Few hard and fast rules for organizing– One Big Rule: Role and purpose of organization structure is to support and facilitate

good strategy execution!

• Each firm’s structure is idiosyncratic, reflecting– Prior arrangements and internal politics

– Executive judgments and preferences about how to arrange reporting relationships

– How best to integrate and coordinate work effort of different work groups and departments

Vice President Vice President Vice President

CEO

Step 1: Decide Which Value Chain Activities to Perform Internally and Which to Outsource

• Involves deciding which activities areessential to strategic success– Most strategies entail certain crucial business processes or activities that must be

performed exceedingly well or in closely coordinated fashion if the strategy isto be executed with real proficiency

• These processes/activities usually need to be performed internally

– Other activities, such as routine administrative housekeeping and some support functions, may becandidates for outsourcing

Criticalactivities

Pinpointing Strategy-Critical Activities: Ask 2 Questions

1. What functions or business processeshave to be performed extra well or intimely fashion to achieve competitive advantage?

2. In what value-chain activities wouldpoor execution seriously impairstrategic success?

Appeal of Outsourcing

• Outsourcing non-critical activities allows a firm to concentrate its energies and resources on those value-chain activities where it

– Can create unique value

– Can be best in the industry

– Needs direct control to

• Build core competences

• Achieve competitive advantage

• Manage key customer-supplier-distributor relationships

Potential Advantages of Partnering• By building, improving, and then leveraging partnerships, a firm

enhances its overall capabilities and builds resource strengths that

– Deliver value to customers

– Rivals can’t quite match

– Consequently pave the wayfor competitive success

Partnering makes strategic sense when theresult is to enhance a company’s competences and

competitive capabilities.

Dangers of Outsourcing

• A company must guard against hollowing out its knowledge base and capabilities

• Way to guard against pitfalls of outsourcing

– Avoid sourcing key components from a single supplier

– Use two or three suppliers to minimizedependence on any one supplier

– Regularly evaluate suppliers

– Work closely with key suppliers

Step 2: Make Strategy-CriticalActivities the Main Building Blocks

• Assign managers of strategy-critical activities a visible, influential position

• Avoid fragmenting responsibility for strategy-critical activities across many departments

• Provide coordinating linkages between related work groups

– Meld into a valuablecompetitive capability

Assignmanagerskey roles

Primary activities

Strategicrelation-

ships

Coordi-nation

Valuablecapability

Supportfunctions

Why StructureFollows Strategy

• Changes in strategy typically require a new or modified organization structure

– A new strategy often involves different skills,different key activities, and different staffingand organizational requirements

– Hence, a new strategy signals a need toreassess and often modify the organization structure

• How work is structured is a means to an end –not an end in itself!

Guard Against FunctionalDesigns That Fragment Activities

• Scattering pieces of critical business processes across several specialized departments results in– Many hand-offs which

• Lengthens completion time • Increases coordination and overhead costs• Increases risk of details falling

through the cracks

– Obsession with activity rather than result

• Solution Business process reengineering– Involves pulling strategy-critical processes from functional silos to create

process-complete departments or cross-functional work groups

Examples of Fragmented Strategy-Critical Activities

• Filling customer orders

• Speeding new products to market

• Improving product quality

• Supply chain management

• Building capability to conduct business via the Internet

• Obtaining feedback from customers, making product modifications to meet their needs

Step 3: Determine How MuchAuthority to Delegate to Whom

• In a centralized structure

– Top managers retain authorityfor most decisions

• In a decentralized structure

– Managers and employees areempowered to make decisions

• Trend in most companies

– Shift from authoritarian to decentralizedstructures stressing empowerment

Advantages of a Decentralized Structure

• Creates a more horizontal structure with fewer management layers• Managers and employees develop their own answers and action plans

– Make decisions in their areas of responsibility– Held accountable for results

• Shortens organizational response times and spurs– New ideas– Creative thinking and innovation– Greater involvement of managers and employees

• Jobs can be defined more broadly• Fewer managers are needed• Electronic communication systems provide quick, direct access to data• Genuine gains in morale and productivity

Maintaining Control in a Decentralized Structure

• Place limits on authority empowered employees can exercise

• Hold people accountable for their decisions

• Institute compensation incentives that reward employees for doing their jobs in a manner contributing to good company performance

• Create a corporate culture wherethere’s strong peer pressure onemployees to act responsibly

Step 4: Provide for InternalCross-Unit Coordination

• Classic method of coordinating activities – Have related units report to single manager

– Upper-level managers have clout tocoordinate efforts of their units

• Support activities should bewoven into structure to

– Maximize performance of primary activities

– Contain costs of support activities

• Formal reporting relationships often need to be supplemented to facilitate coordination

Coordinating Mechanisms to Supplement the Basic Organization Structure

• Cross-functional task forces

• Dual reporting relationships

• Informal networking

• Voluntary cooperation

• Incentive compensation tiedto group performance

• Teamwork and cross-departmental cooperation

Step 5: Provide forCollaboration With Outsiders

• Need multiple ties at multiple levels to ensure

– Communication

– Coordination and control

• Find ways to produce collaborative efforts toenhance firm’s capabilities and resource strengths

• While collaborative relationships present opportunities, nothing valuable is realized until the relationship develops into an engine for better organizational performance

Roles of Relationship ManagersWith Strategic Partners

• Get right people together

• Promote good rapport

• See plans for specific activitiesare developed and implemented

• Help adjust internal procedures and communication systems to

– Iron out operating dissimilarities

– Nurture interpersonal ties

Perspectives on Organizing

• All basic organization designs have strategy-related strengths and weaknesses

• No ideal organization design exists

• To do a good job of matching structure to strategy

– Pick a basic design

– Modify as needed

– Supplement with appropriate coordinating, networking, and communication mechanisms to support effective execution of the strategy

Organizational Structures ofthe Future: Overall Themes

• Revolutionary changes in how work is organized have been triggered by– New strategic priorities

– Rapidly shifting competitive conditions

• Tools of organizational design include– Empowered managers and workers

– Reengineered work processes

– Self-directed work teams

– Rapid incorporation of Internettechnology

– Networking with outsiders

The future structure

will be . . .

Drawbacks of Centralized Authoritarian Structures

• Centralized or authoritarian structures have often turned out to be a liability where

– Customer preferences shift fromstandardized to customized products

– Product life-cycles grow shorter

– Flexible manufacturing replaces mass production

– Customers want to be treated as individuals

– Pace of technological change accelerates

– Market conditions are fluid

Characteristics ofOrganizations of the Future

• Fewer barriers between– Different vertical ranks

– Functions and disciplines

– Units in different geographic locations

– Company and its suppliers, distributors,strategic allies, and customers

• Capacity for change and rapid learning

• Collaborative efforts among people in differentfunctions and geographic locations

• Extensive use of Internet technologyand e-commerce business practices

Change &Learning

Strategic Control and Continuous Improvement

• Establishing Strategic Controls• Premise Control

• Strategic Surveillance

• Special Alert Control

• Implementation Control

• The Quality Imperative: Continuous Improvement to Build Customer Value

What is Strategic Control?

Tracks a strategy as it is implemented, detects problems or

changes in its underlying premises, and makes necessary adjustments

Questions Involved in Assessing a Strategy’s Success

1. Are we moving in the proper direction? Are our assumptions about major trends and changes correct? Should we adjust or abort the strategy?

2. How are we performing? Are objectives and schedules being met? Are costs, revenues, and cash flows matching projections? Do we need to make operational changes?

Four Types of Strategic Control

Strategic Surveillance

Premise Control

Time 1

Strategy Formulation

Time 2 Time 3Strategy Implementation

Implementation Control

Special Alert Control

Characteristics of the Four Types of Strategic Control

Basic CharacteristicsPremise Control Implementation Control



Objects of control

Degree of focusing

Data Acquisition:FormalizationCentralization

Planning premises and projections

High

MediumLow

Key strategic thrusts and milestones

High

HighMedium

Potential threats and opportunities related to the strategyLow

LowLow

Occurrence of recognizable but unlikely events

High

HighHigh

Characteristics of the Four Types of Strategic Control

Basic Characteristics Premise Control Implementation Control



Use with:Environmental factorsIndustry factorsStrategy-specific factorsCompany-specific factors

Yes

YesNo

No

Seldom

SeldomYes

Yes

Yes

YesSeldom

Seldom

Yes

YesYes

Seldom

Definitions of Strategic Controls

• Premise Control – Designed to check systematically and continuously whether premises on which the strategy is based are still valid

• Strategic Surveillance – Designed to monitor a broad range of events inside and outside the firm that are likely to affect the course of its strategy

• Special Alert Control – Thorough, and often rapid, reconsideration of the firm’s strategy because of a sudden, unexpected event

• Implementation Control – Designed to assess whether the overall strategy should be changed in light of the results associated with the incremental actions that implement the overall strategy

Types of Implementation Control

Milestone reviews

Monitoring strategic thrusts

Establishing Effective Operational Control Systems

Set standards of performance

Measure actual performance

Initiate corrective action

Identify deviations from standards set

Steps involved in post action control

systems

Concepts Related to TQM

• Viewed as a new organizational culture and way of thinking

• Foundations of TQM

– Intense focus on customer satisfaction

– Accurate measurement of every critical variable in a business’s operation

– Continuous improvement of products, services, and processes

– Work relationships based on trust and teamwork

Key Elements of Implementing TQM

• Define quality and customer value

• Develop a customer orientation

• Focus on company’s business processes

• Develop customer and supplier partnerships

• Take a preventive approach

• Adopt an error-free attitude

• Get the facts first

• Encourage all levels of employees to participate

• Create an atmosphere of total involvement

• Strive for continuous improvement

The Value Chain Approach to Developing a Customer Orientation

External suppliers

Internal suppliers

(functions)

Input

Input

Function(like production)

Seeking:QualityEfficiencyResponsiveness

Outputs

Outputs

External(ultimate)customer

Otherinternalcustomers(activities)

What is Six-Sigma?

A highly rigorous and analytical approach to quality and continuous improvement with an objective to improve profits through deficit reduction, yield improvement, improved customer satisfaction and best-in-class performance

Differences Between TQM and Six-Sigma

• Acute understanding of customers and the product or service provided

• Emphasis on the science of statistics and measurement

• Meticulous and structured training development

• Strict and project-focused methodologies

• Reinforcement of the doctrine advocated by Juran such as top management support and continuous education

ISO 9001

• The ISO 9001 standard focuses on achieving customer satisfaction through • Continuous measurement

• Documentation

• Assessment

• Adjustment

• It specifies requirements where an organization• Needs to demonstrate its ability to consistently provide product and services that meet

customer requirements

• Aims to enhance customer satisfaction through the effective application of the system, including processes for continual improvement of the system and the assurance of conformation to customer requirements

The Balanced Scorecard Methodology

• Intends to provide a clear prescription as to what companies should measure in order to “balance” the financial perspective in implementation and control of strategic plans

• It adapts the TQM ideas of customer-defined quality, continuous improvement, employee empowerment, and measurement-based management/feedback into an expanded methodology that includes traditional financial data and results

• Uses four perspectives: the learning and growth perspective, the business process perspective, the customer perspective, and the financial perspective

Integrating Shareholder Value and Organizational Activities Across

Organizational Levels

CEO Corporate/Divisional Functional Depts. and Teams

Shareholder value creation ROCE

Economic Profit

Margin

Capital Turnover

Sales Targets

COGS/Sales

Dev. Cost/ Sales

Inv. Turnover

Cap. Utilization

Cash Turnover

Order SizeCustomer MixSales/AccountCustomer Churn RateDeficit RatesCost Per DeliveryMaintenance CostNew Product Dev. TimeIndirect/Direct LaborCustomer ComplaintsDowntimeAccounts Payable TimeAccounts Receivable Time

Balanced Score Card –A Strategy Tool

Strategic Planning ModelA B C D E

• Environmental Scan

Assessment

• Background Information

• Situational Analysis

• SWOT – Strength’s, Weaknesses, Opportunities, Threats

• Situation – Past, Present and Future

• Significant Issues

• Align / Fit with Capabilities

• Mission & Vision

• Values / Guiding Principles

• Major Goals

• Specific Objectives

• Performance Measurement

• Targets / Standards of Performance

• Initiatives and Projects

Baseline Components

• Performance Management

• Review Progress – Balanced Scorecard

• Take Corrective Actions

Down to Specifics

Evaluate

Where we are Where we want to be How we will do it How are we doing

• Gaps • Action Plans • Feedback upstream – revise plans

The Balanced Scorecard and The Big Picture

•Activity Based Costing•Economic Value Added•Forecasting•Benchmarking•Market Research•Best Practices•Six Sigma•Statistical Process Control•Reengineering•ISO 9000•Total Quality Management•Empowerment•Learning Organization•Self-Directed Work Teams•Change Management

Missionand

Vision

BalancedScorecard

StrategicPlanning

Balanced Score Card• Balanced Scorecard was first proposed by Dr.

Kaplan and Norton in 1992 and has since evolved into a strategic planning tool.

• Many big corporations around the world have adopted the Balanced Scorecard in its full scale operation.

• Incidentally, Strategy Map is one of the tools used within the concept of Balanced Scorecard.

• Using Balanced Scorecard concept is an effective way to translate shareholder expectations into Key Performance Indicators for an organization

• We will learn- How to use a Strategy Map to translate an expectation from shareholder into a set of key Performance Indicators

• We will learn-How to Strategy Maps as a dashboard for performance monitoring and tracking of the business performance for busy entrepreneur, businessman or executive shareholders.

What is a Strategy Map?• It is a process to translate strategy into strategic objectives in

the four perspective of Balanced Scorecard.• Each of these Strategic objectives are required to be inter-

dependent with each other. • To develop the inter-dependency of each of these objectives,

a commonly known “cause and effect “ relationship was used to perform it.

• A well aligned strategic objectives should be well aligned for a common goal i.e. supporting each others to achieve the shareholder's expectations.

The four perspectives of Balanced Scorecard are stated below:-

Balanced Scorecard, a method intended to give managers a fast, comprehensive view of the performance of a business via-

• Financial Perspective

• Customer Perspective

• Process Perspective

• Learning and Growth

• FINANCIALS PERSPECTIVES– Financial indicators will vary from organization to organization but they are based on

the expectancy of the organization’s strategic objective.– Examples: Revenue, Growth, Reductions, Margins, Profitability, Cash Flow, ROI,

Forecasts

• CUSTOMER PERSPECTIVES– Identifies Customers, Markets, Value Proposition and Satisfaction– Examples: Market Share, Retention, New Customers, Satisfaction Indexes, Customers

Profitability, Product/Service Attributes

• PROCESS(INTERNAL) PERSPECTIVES– Internal Perspectives is the critical processes necessary for delivery of superior

performance in achieving financial measures.– Examples: Project Performance, Reflections/Reworks, Cycle Times, Success Rates

• LEARNING AND GROWTH– Identity and Resources of the Organizational Framework– Examples: Staff Performance, Employee Satisfaction, Training

FINANCIAL/REGULATORYTo satisfy our constituents, what financial & regulatory

objectives must we accomplish?

CUSTOMERTo achieve our vision,

what customer needs must we serve?

INTERNALTo satisfy our customers and

stakeholders, in which business processes must we excel?

LEARNING & GROWTHTo achieve our goals, how

must we learn, communicate and grow?

THE BALANCED SCORECARDTHE BALANCED SCORECARD

Who should perform the Strategy Mapping?

• Ideally, it should be performed by the same group of people who did the Strategic Planning Process.

• However, some CEO argue that since the Strategies are fixed, there is no need for the CEO to be involved in developing the Key Performance Indicator (KPI) One of the reasons for such a behavior is understandable because the CEO may already a goal for his strategies.

• Hence, to him, doing a Strategic Map to develop the KPI is an academic exercise.• In conclusion, you have to decided which path you want your team to take. If at all

you want to develop the Key Performance Indicators based on the four perspectives, then you should learn how to perform the Strategy Map effectively.

Identifying Indicators of Organization

• Performance indicators differ from business drivers & aims (or goals). A School might consider the failure rate of its students as a Key Performance Indicator which might help the school understand its position in the educational community, whereas a Business might consider the percentage of income from return customers as a potential KPI.

• But it is necessary for an organization to at least identify its KPIs. The key environments for identifying KPIs are:– Having a pre-defined business process (BP). – Requirements for the business processes. – Having a quantitative/qualitative measurement of the results and comparison with set goals. – Investigating variances and tweaking processes or resources to achieve short-term goals

Marketing KPIs(The following more or less describe

………what a bank /service sectors would do? 1. Customer related numbers:

– New customers acquired – Status of existing customers – Customer attrition

1. Turnover generated by segments of the customers - these could be demographic filters. 2. Outstanding balances held by segments of customers and terms of payment - these could

be demographic filters. 3. Collection of bad debts within customer relationships. 4. Demographic analysis of individuals (potential customers) applying to become

customers, and the levels of approval, rejections and pending numbers. 5. Profitability of customers by demographic segments and segmentation of customers by

profitability.

http://en.wikipedia.org/wiki/Customer

http://en.wikipedia.org/wiki/Customer_attrition

http://en.wikipedia.org/wiki/Revenue

Categorization of indicators

• Key Performance Indicators define a set of values used to measure against. These raw sets of values fed to systems to summarize information against are called indicators. Indicators identifiable as possible candidates for KPIs can be summarized into the following sub-categories:– Quantitative indicators which can be presented as a number. – Practical indicators that interface with existing company processes. – Directional indicators specifying whether an organization is getting better or not. – Actionable indicators are sufficiently in an organization's control to effect

change. – Financial indicators used in performance measurement

http://en.wikipedia.org/wiki/Performance_measurement

• Key Performance Indicators in practical terms and strategy development means are objectives to be targeted that will add the value to the business most (most = KEY INDICATORS OF SUCCESS).

Thank You

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