ch 2 Understanding the strategies

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    Goals1. Profitability :Revenue Expenses * Revenues = ROI

    Revenues Investment

    Investment (shareholder s Investment)= Issuance of Stock + Retained EarningInvestment = Total of Debt capital + Equity Capitale.g. Anil Ambani stressed on sales revenue as

    important component for profitability

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    2. Maximizing the shareholders value :Here, maximizing implies that there is a way of finding maximum amount that company earns, whichis not the case. The goal is to maximize shareholder

    value.Profit maximization requires calculation of marginal

    costs and demand curve and generally managers donot know about it clearly

    It refers to the market price of the corporation s stock.

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    3. Risk:

    Degree of risk-taking varies with personalities of different managersManagement s primary responsibility is to preservecompany assets with profitability as a second goal

    Higher the risk, higher the R.O.I. & vice-versa.Other Goals:

    An organization may have following goals.Organization EffectivenessHigh Productivity Profit MaximizationOrganizational Stability

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    Str a tegy Formu lation P roce ssEnvironmental Analysis Internal analysis

    Competitors

    CustomersSuppliersGovernment

    Social / political

    Technological know how

    Manufacturing know howMarketing know howDistribution know how

    Logistics know how

    Opp ortunities & threats Strengths & Weaknesses

    Fit Internal Competencies with External Opportunities

    Firm s Strategies

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    C orp ora te leve l str a tegy y Single industry :

    e.g. Infosys in Software, Wrigley Chewing Gum, NucorSteel etc.

    y Related industry common resources like sales force, manufacturingfacilities, procurement function can be shared e.g.Procter and GambleFirms grow by leveraging core competenciesdeveloped in one business when they diversify such firms grow internally through R & D

    y Unrelated industry :

    e.g. Tata Empire

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    Re se arch anal ysisy Related diversified firms perform the best, single

    industry firm perform next best & unrelated

    diversified firm do not perform well over the long runy Unrelated diversified firm do not posses operating

    synergies

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    B u sine ss u n it str a tegie sy Portfolio matrix (BCG matrix)

    MarketGrowth Rate

    Market Share

    BuildHold

    Harvest Divest

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    B u sine ss Un it Str a tegie sComponents of BCG Matrix:Build: increase market share at expense of short-term

    earnings and cash flowHold: protect business-unit s market share andcompetitive positionHarvest: maximise short-term earnings and cash-flow,even at expense of market shareDivest: withdraw from the business either throughprocess of slow liquidation or outright sale

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    Limit a tion Of BC G m a trixy Market share & low cost are not only ways to successesy Improvement in process technology may have a grater

    impact on the reduction of per unit cost thancumulative volume per secondy Reducing cost via accumulated production of

    standardized items can lead to loss of flexibility in themarket place

    y Commitment to experience curve concept can besevere disadvantage if few technologies emerges in theindustry

    y Experiences is not only the cost driver

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    GE(Ge ner al Ele ctri c)/McK ins ey Mu lti-

    Factor Ma trixy Originally developed by GE s planners drawing on

    McKinsey s approachesy

    Market attractiveness is based on as many relevantfactors as are appropriate in a given contexty Business-position assessment also made on a many

    factorsy

    SBU needs to be rated on each factor

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    GE Mu lti fac to r Po rt fol io Ma trixIndustry Attractiveness

    High

    High

    Medium

    Medium

    Low

    Low

    Invest/Grow

    Selectivity /earnings

    Harvest/Divest

    ProtectPosition

    Invest toBuild

    Buildselectively

    Buildselectively

    Selectively manage forearnings

    Limitedexpansion orharvest

    Protect &refocus

    Divest

    Manage forearnings

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    Some Limit a tions of the GE Mod e ly Subjective measurements across SB Usy Process also highly subjectivey

    From the selection and weighting of factors to thesubsequent development of both a firm s positionand the market attractiveness

    y Businesses may have been evaluated with respectto different criteria

    y Sensitive to how a product market is defined

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    B u sine ss u n it competitive

    Advan tage sy Porter s Five force analysis :1. Rivalry among competitors2. Bargaining power of buyers3. Bargaining power of suppliers4. Availability of substitute products5. Threat of new entrancesy Generic competitive Advantages :

    1. Cost leadership2. Differentiated3. Focus4. Value chain analysis