Integrated Management - Nature of SM

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Integrated Management

The basis of strategic management

The nature of strategic managementPrepared by Praveen M


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The history of Strategy The concept of strategy has been borrowed from the military and adopted for business

Strategy is a term that comes from the Greek strategia, meaning "generalship

9 years of war Greeks finally came up with an effective strategyto destroy the city of Troy

End objective

Policies /

resourcesTactics

Bridging the gap

Strategy

How we need to do it..Eg: war no use of nuclearwarfare

Business Responsible andethical

How we do it..Eg: war Surprise attackBusiness Promotions


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The link between war and business

War Business

Objective Capturing a territory or defendingone

Capturing consumers ordefending own base

Reason Power , control and resources Profit, economies of scale andsustainability

It is all about.. ..the need to defeat the enemyand to win the war

.. being ahead of competition andwin market share

Strategy is the path that one selects to achieve a particular goal or a set of

objectives


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Formal definitions of strategy

A course of action, including the specification of resources required, to achieve aspecific objective CIMA

The art of distributing and applying business means to fulfil the ends of policy." -Liddell Hart

"Strategy is the direction and scope of an organisation over the long-term

An effective strategy achieves advantage for the organisation through its

configuration of resources within a challenging environment, to meet the needs ofmarkets and to fulfill stakeholder expectations

A strategy is a long term plan of action designed to achieve a particular goal, mostoften "winning

Strategy is differentiated from tactics with resources at hand by its nature of being

extensively premeditated, and often practically rehearsed Strategies are used to

make the problem or problems easier to understand and solve.


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Elements of strategy

Competitive

strategy

Investment and

resources

strategy

Financial strategy

Providesearnings and

cash flow

Providesresources

Provides finance

How the business

competes

Eg: Walmart, Honda,

Dialog, Fonterra

How the business

funds its business,

manage its profits

Eg: Shareholder

expectations,

investments, cash flow

management

How the business should

invest in future revenue

streams and allocation of

resources

Eg: New business,

resource allocations

(BCG)


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Levels of strategy

Corporate strategy Setting the overall purpose of the and scope of the organisation Why? Direction,

Consistency, achieving a single goal Why is strategy at this level limited to only the purpose and scope? Since strategy

was not always relevant in all end markets (lack of flexibility) Strategic planning(Western) vs Strategic intent (Japanese)

Eg: BAT, IBM, GE, Nokia, Dialog, Philip Morris

Business strategy Management of the SBU which will be responsible for generating profits by winning

customers and beating competitors in its market Competitive strategy is generallyformulated at this level

Eg: CTC, Mc Donald's, KFC, Hilton Definition of SBU A section usually a division, within a larger organisation, that has a

significant degree of autonomy, typically being responsible for developing and marketingits own products or services CIMA

Functional strategy (operational) Intended to ensure that the fictional area plays its part in achieving the business strategy Marketing, Finance, HR, IT


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Approaches to strategy formulation Rational strategy approach

A strategic approach that follows a rational process

Emergent strategy approach Is a strategy that is realised despite a planned strategy

A patterns or consistencies realised despite, or in the absence of, intentions Minitzberg

Mission and

objectives

Corporate

appraisalStrategic options

Strategy

evaluation and

choice

Strategy

implementation

Environmental

analysis

Position audit Review andcontrol

Intendedstrategy

Deliberatestrategy

Unrealised

strategy

Realisedstrategy

Emergent

strategy


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Mission and objectives

A strategic plan starts with a clearly defined business mission An organizations mission is its basic function or purpose in the society. The fundamental

reason for companys to existence beyond just making money

Disney :Use our imagination to make millions of people happy

Ford (In early 1900s) :Make automobile affordable to ordinary folks

Marriott Hotels: To make people away from home feel that they are among friendsand really wanted

Wal-Mart : Make the lives of our customers better by providing lower prices and

greater selection

Motorola : Honorably serve the community by providing products of superior quality

at a fair price to the consumers

CTC: To be the inspiration for corporate excellence in Sri Lanka


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A Mission Statement helps the company in the

following

Define long term visionWhere we want to go / be Providing clarity of Purpose what business are we in..

Guild lines for resource allocation

Influence management philosophy and company climate

Identify business domainWhere do we compete

Motivation of personnel

Mission of McDonalds To provide quality food products; efficient , friendly service; and

restaurants renowned for cleanliness and value


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Mission and objectives..

Count..

Objectives are the specific aims of an organisation

Objectives would generally have the following characteristics S pecific

M easurable

A ttainable

R esults oriented

T ime bounded

Examples: To increase bottom line by 20% within the next year.

To reduce customer complains by 50% within the next 3 months

To collect 90% of the debts on time by the end of the year. To provide a 20% increase in salaries to employees by the end of next year.

R l f Mi i


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Roles of Mission

statements

To provide a basis for consistent planning

To assist in translating purpose and direction into objectives suitable for assessment and control To provide a consistent purpose between different interested groups connected to the

organisation To establish organisational goals and ethics To improve understanding and support from key groups outside the organisation

Goal structure

Mission statement

Strategic objectives

Tactical objectives

Operational objectives

Individual performance targets


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Financial objectives are not useful for start up businesses

Profit or positive cash flows will not be achieved in the first year

Short term view only If the objectives are only limited to measures such as return on capital

employed (ROCE) and Earning per share (EPS) investments for the long term

will be compromised

No control over strategic behaviour Profit is only a measure of its economic activity in a given period and not its

entire goal structure

Financial objectives can be manipulated by creative accounting Having non financial objectives will ensure that managers follow the expected

strategy and not only profit generation by unethical means

Need for financial and non financial objectives


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Environmental analysis

A scan of the external macro-environment in which the firm operates can

be expressed in terms of the following factors Political

Economic

Social

Technological

E i l l i


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Political factors include government regulations and legal issues and

define both formal and informal rules under which the firm must operate.

Tax policy Different tax on nature of products (Raw material vs finished

goods)

Employment laws Malaysia quotas for locals

Environmental regulations Import and export of agricultural goods to fromAustralia

Trade restrictions and tariffs Indias trade policies to protect the local

industries

Political stability Sri Lankas instability impacting tourism

Environmental analysis -

PEST

E i t l l i


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Economic factors affect the purchasing power of potential customers and

the firms cost of capital.

Economic growth GDP, GNP Impact on business growth

Interest rates Impact on investments

Exchange rates Impact on export and / or import decisions and profits

Inflation rate Sri Lanka CPI (Consumer price index), CCPI Impact onconsumer disposable income


PEST

E i t l l i


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Social / Cultural factors include the demographic and cultural aspects of theexternal macro environment. These factors affect customer needs and the

size of potential markets.

Health consciousness

Population growth rate Japans population lower that 1% impact on future

labour force

Age distribution Sri Lanka has an aging population opportunity for health

services, insurance etc.

Career attitudes

Emphasis on safety

Values and believes can vary from country to country Alcohol can not be sold in

the middle East, Barbie needed to change in China and middle east, Rejection of

western values in middle east (Coke boycott), McDonald's in India


PEST

E i t l l i


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Technological factors can lower barriers to entry, reduce minimum

efficient production levels, and influence outsourcing decisions.

R&D activity

Automation

Technology incentives Indias boom in the outsourcing operations

Rate of technological change Telecom industry, banking etc.


PEST

C tit l i


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Porter explains that there are five forces that determine industry attractivenessand long-run industry profitability. These five "competitive forces" are

The threat of entry of new entrants

The threat of substitutes

The bargaining power of buyers The bargaining power of suppliers

The degree of rivalry between existing competitors

Competitor analysisFive Forces Model

P t Fi F M d l t d t d C titi


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Porters Five Forces Model to understand Competitive

Environment

IndustryRivalry

Industry

Rivalry

New Entrants

BuyersSuppliers

Substitutes

Threat

Threat

Bargaining

Power

Bargaining

Power

C tit l i


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The threat of new entrants largely depends on the barriers to entry whichinclude

Economies of scale

Capital / investment requirements

Customer switching costs Access to industry distribution channels

The likelihood of retaliation from existing industry players.


C tit l i


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The presence of substitute products can lower industry attractiveness andprofitability because they limit price levels. The threat of substitute products

depends on:

Buyers' willingness to substitute Branded salt vs unbranded

The relative price and performance of substitutes

British rail The costs of switching to substitutes Switching banks Better interest rates

but loss of relationships, convenience


Competitor analysis


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Suppliers are the businesses that supply materials & other products into

the industry. The bargaining power of suppliers will be high when;

There are many buyers and few dominant suppliers Oil (OPEC)

There are undifferentiated, highly valued products Ceylon tea

The industry is not a key customer to the suppliers


Competitor analysis


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The bargaining power of buyers is greater when;

There are few dominant buyers and many sellers Sri Lanka CTC, designer

cloths (MAS)

Products are not differentiated Cloths costs of production key differentiator

not the finished goods

The industry is not a key supplier to buyers


Competitor analysis


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The intensity of rivalry between competitors in an industry will dependon:

The structure of competition,

The structure of industry costs

The Degree of differentiation between competitors


P iti dit


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Position audit is done to understand Where are we now? Money Financials, shareholders Materials Product Machines Production & Processes Markets Markets & Customers Men & Women Human Resources

Value Chain Analysis describes the activities that take place in abusiness and relates them to an analysis of the competitive strength of thebusiness. Influential work by Michael Porter suggested that the activities ofa business could be grouped under two headings:

Primary Activities - those that are directly concerned with creating anddelivering a product (e.g. component assembly)

Support Activities, which whilst they are not directly involved in production,may increase effectiveness or efficiency (e.g. human resource management).It is rare for a business to undertake all primary and support activities.

Position audit

Position audit - Value Chain


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Firm Infrastructure

Human Resource Management

Technology Development

Procurement

Inbound

Logistics

Operations Outbound

Logistics

Marketing

and

sales

Services

Primary Activities

Supp

ortActivities

Margins

Margi

ns

Position audit Value ChainAnalysis

Corporate appraisal


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The SWOT analysis provides information that is helpful in matching the firms

resources and capabilities to the competitive environment in which it operates.As such, it is instrumental in strategy formulation and selection.

p pp

SWOT analysis

Strengths Weaknesses

Opportunities Threats

Internal

External

Conversion

Conversion

Ma

tch

ing

Corporate appraisal


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A firms strengths are its resources and capabilities that can be used as abasis for developing a competitive advantage. Examples of such

strengths include:

Patents

Strong brand names

Good reputation among customers

Cost advantages from proprietary know-how

Exclusive access to high grade natural resources

Favorable access to distribution networks

p pp

SWOT analysis

Corporate appraisal


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The absence of certain strengths may be viewed as a weakness. Forexample, each of the following may be considered weaknesses:

Lack of patent protection

A weak brand name

Poor reputation among customers High cost structure

Lack of access to the best natural resources

Lack of access to key distribution channels

p pp

SWOT analysis

Corporate appraisal


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The external environmental analysis may reveal certain new opportunitiesfor profit and growth. Some examples of such opportunities include:

An unfulfilled customer need

Arrival of new technologies

Loosening of regulations Removal of international trade barriers

p pp

SWOT analysis


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Corporate appraisal


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Ultimate objectives compared with extrapolated existing performance to identifythe gap

Gap analysis

Profits

Time

Target

Forecast

Identify the Gap

GapHow do we

bridge the

gap?

Competitive strategies


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Michael Porter suggested that for an organisation to achieve a sustainablecompetitive advantage they should follow either one of three generic

strategies.

Cost leadership

Differentiation

Focus



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Cost Leadership strategy

This strategy involves the organisation aiming to be the lowest cost producer within theirindustry. The organisation aims to drive cost down through all the elements of theproduction of the product from sourcing, to labour costs.

Differentiation strategy. To be different, is what organisations strive for. Having a competitive advantage which

allows the company and its products ranges to stand out is crucial for their success. With

a differentiation strategy the organisation aims to focus its effort on particular segmentsand charge for the added differentiated value.

Focus strategy. Here the organization focuses its effort on one particular segment and becomes well

known for providing products/services within the segment. They form a competitiveadvantage for this niche market and either succeed by being a low cost producer or

differentiator within that particular segment.


Competitive strategies Approaches to developing competitive


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Positioning view Competitive advantage streams from the organisations position in

relation to its competitors, customers or stakeholders External view

in developing competitive advantage Fit the Environment

(Generic strategies)

Resource based view Competitive advantage stream from some unique asset or

competence possessed by the firm Internal view Change the

Environment

Approaches to developing competitive

advantage

Criticism of position and resource based views


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Positioning view Resource view

Competitive advantages are not sustainable Conflict with conventional product / market-based

views of strategy (IBM)

Environments are too dynamic to enable

positioning to be effective

Challenges the rational model of strategy RBT

stats with the corporate appraisal limited or no

emphasis of the environment

It is easier to change the environment than

change the organisation

RBT can lead to different conclusions Focus

only on core competency could lead to keyelements of success being outsourced (IBM

Intel and Microsoft)

Strategy Implementation


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Tactical programmes and decisions

Medium term policies to implement some key elements of strategy Eg: New products, variants (Elephant House ice creams), recruitment or

downsizing

Operational programmes and decisions

Day to day operations of an organisation

Strategy Implementation

Critical Success Factors (CSF)


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Definition: The limited number of areas in which results, if there are satisfactory,

will enable successful competitive performance Rockart & Hoffman, 1992.

( )

Methodology of CSF analysis

Identify CSF for the specific strategy (6 or less)

Identify underpinning competencies essential to

gain competitive advantage in each CSF

Ensure that the list of competences is sufficient to

give competitive advantage

Identify performance standards that need to be

achieved to out perform competition KPI

Ensure competitors will not be able to imitate or

better perform

Monitor own and competition of on KPIs

Criticism of the rational approach to strategy


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Organisations are incapable of having objectives People decide on organisational direction Conflict within the group and external stakeholders

Objectives are based on satisficingall

Senior management should not be the only people involved in strategy Lack of understanding of tactical and operational challenges

Understanding of the diversity of the culture within divisions

Strategy formulation is not a step by step process

Generally the strategy formulation is a jumbled process that consists of revisiting assumptions madewhich would lead to change in strategy

The strategy followed is not what is planned The external context could change significantly effecting the planned strategy

Strategy is not something that is decided in advance Strategy is emergent

Strategy should not be a rational process Strategy will change as people and context changes to meet objectives successfully

pp gy

Approaches to formulating business strategy


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pp g gy

Formal top down strategy process

Designated team responsible for

strategy development

Permanent team Cross-functional teams (CTC, Apple) Consultants

Collection of information

Collective decisions by senior

management

Communication and

implementation

Review and control

External and internal information needed

for business strategy planning

Co-plan cascading process Tactical and operational plans (CSF and

KPIs)

Review KPIs with the use of a dashboard Variance reports

Benefits and drawbacks of business strategy


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Benefits Drawbacks

Avoids short term behaviour It is too infrequent to allow the business be

dynamic

Helps identify strategic issues It forbids the development of radical or innovative

strategy (Microsoft, Apple, Intel, Body shop)

Goal congruence Coordination of business

units, divisions and departments

It suffers from difficulties of implementation

Involvement of only the senior team

Improves stakeholder perceptions of the business

Build confidence amongst internal and external

stakeholders

The loss of entrepreneurial spirit

Provides a basis for strategic control It is impossible in uncertain business environment

Develops future management potential and

continuity

It is complicated and expensive for small

business

Stakeholders


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Definition : Those persons and organisations that have an interest in the

strategy of an organisation CIMA

Different types of stakeholders Internal Employees

Connected stakeholders Suppliers, shareholders

External Customer, local community, government

Why are stakeholders important for business success? Stakeholders can effect business success by supporting or opposing business

strategy (Nike, Shell)

Expectation of business to be good citizens as it is the society that permits

business to exist Power

Integrated Management - Nature of SM

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