Strategic Management Module

Without a strategy the organization is like a ship without a rudder, going around in circles

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CONTENTS

The Concepts and Techniques of Strategic Management.

The Strategic management Process: An overview.

Establishing company Direction: Developing a Strategic Vision, setting objectives and crafting a strategy.

Industry and competitive analysises.

Evaluating company Resources and competitive capabilities.

Strategy and competitive advantage.

Strategies for Globalizing markets.

Tailoring strategy to fit specific industry and company situation.

Strategy and competitive advantage in diversified companies.Evaluating the strategies of diversified companies.

Building resource strengths and organization capabilities.

Managing the internal organization to promote better strategy execution.

CHAPTER 1

THE STRATEGIC MANAGEMENT PROCESS

Without a strategy the organization is like a ship without a rudder, going around in circles.

(Joel Ross and Michael Kamei)

Chapter Outline

Five tasks of strategic management Developing a strategic vision and mission

Setting objectives

Crafting performance and initiating corrective adjustments

Why strategic management is a process

Who performs the task of strategy?

Benefits of Managing Strategically

Terms to remember

Thinking Strategically:

The Three Big Strategic Questions

Where are we now what is our situation?

Where do we want to go?

Business (es) we want to be in and market positions we want to stake out

Buyer needs and groups we want to serve

Outcomes we want to achieve

How will we get there?

What is strategy?

Competitive moves and business approaches management employs in running a company

Managements game plan to

Please customers

Position a company in its chosen market

Compete successfully

Achieve good business performance

Why are strategies needed?

To proactively shape how a companys business will be conducted

To mold the independent actions and decisions of managers and employees into a coordinated, companywide game plan

The Five Tasks of Strategic Management

Missions vs. Strategic Visions

A mission statement focuses on current business activities Business(es) company is in now

Customer needs currently being served

A strategic vision concerns a firms future business path The kind of company it is trying to become

Customer needs to be satisfied in the future

Strategic Management Concept

N/L

Developing a Vision and Mission

The first task of Strategic Management

Begins with thinking strategically about

The firms future business makeup

Where to take the firm

The task is to Create a roadmap of a companys future

Decide what future business position to stake out

Provide long-term direction

Give the firm a strong identity

Developing a Strategic Vision

A strategic vision is a roadmap of a companys future Direction it is headed

Business position it intends to stake out

Capabilities it plans to develop

Customer needs it intends to serve

Examples: Mission and Vision Statements

McDonalds Corporation

McDonalds vision is to dominate the global foodservice industry. Global dominance means setting the performance standard for customer satisfaction while increasing market share and profitability through our Convenience, Value and Execution Strategies.

Example: Mission and Vision Statements

Avis Rent a-Car

Our business is renting cars. Our mission is total customer satisfaction.

American Red Cross

The mission of the American Red Cross is to improve the quality of human life; to enhance self-reliance and concern for others and to help people avoid, prepare for and cope with emergencies.


Ritz-Carlton Hotels

The Ritz-Calton Hotel is a place where the genuine care and comfort of our guests is our highest mission

We pledge to provide the finest personal service and facilities for our guests who always enjoy a warm, relaxed yet refined ambiance.

The Ritz-Carlton experience enlivens the senses, instils well-being, and fulfils even the unexpressed wishes and needs of our guests.


Otis ElevatorOur mission is to provide any customer a means of moving people and things up, down, and sideways over short distances with higher reliability than any similar enterprise in the world.Microsoft CorporationOne vision drives everything we do: A computer on every desk and in every home using great software as an empowering tool.


The Body Shop

We aim to achieve commercial success by meeting our customers needs through the provision of high quality, good value products with exceptional service and relevant information which enables customers to make informed and responsible choices.

Eastman Kodak

We are in the picture business


Intel

Intel supplies the computing industry with chips, boards, systems, and software. Intels products are used as building blocks to create advanced computing systems for PC users. Intels mission is to be the preeminent building block supplier to the new computing industry worldwide

Compaq Computer

To be the leading supplier of PCs and PC servers in all customer segments.


Long John Silvers

To be Americas best quick service restaurant chain. We will provide each guest great tasting, healthful, reasonably priced fish, seafood, and chicken in a fast, friendly manner on every visit.

Bristol-Myers Squibb

The mission is to extend and enhance human life by providing the highest quality health and personal care products. We intended to be the preeminent global diversified health and personal care Company.

Types of Objectives Required

Financial Objectives

Outcomes focused on improving a firms financial performance

Strategic Objectives

Outcomes focused on improving a firms competitiveness and its long term business position

Examples: Strategic Objectives

Increase firms market share

Overtake key rivals on quality or customer service or product performance.

Attain lower overall costs than rivals

Boost firms reputation with customers

Attain stronger foothold in international markets

Achieve technological superiority

Become leader in new product introductions

Capture attractive growth opportunities

Setting Objectives

The Second Task of strategic Management

-Establishing Objectives-

Converts vision into specific performance targets.

Create yardsticks to track performance

Pushes firm to be inventive and focused

Helps prevent coasting and complacency if targets require stretch

Examples: Financial Objectives

Grow earnings per share 15% annually

Boost annual return on investment (or EVA) from 15% to 20%

Increase annual dividends per share to stockholders by 5% each year.

Strive for stock price appreciation equal to or above the S & P 500 average

Maintain a positive cash flow

Achieve and maintain a AA bond rating

Example: Corporate Objectives

Protect and improve Nike's position as the number one athletic brand in America.

Build a strong momentum in growing fitness market.

Intensify the companys effort to develop products that are women need and want

Explore the market for products specifically designed for the requirements of maturing Americans.

Direct and manage the companys international business as it continues to develop.

Continue the drive for increased margins through proper inventory management and fewer, better products.

Example: McCormicks Corporate Objectives

Dispose of those parts of our business which cannot generate adequate returns or do not fit with our business strategy

Achieve a 20% return on equity

Achieve net sales growth rate of 10% per year

Maintain an average earning per share growth rate of 15% per year

Maintain a total debt to total capital at 40% or less

Pay out 25% to 35% of net income in dividends

Example: Strategic and Financial Objectives

Ford Motor Company

To satisfy our customers by providing Quality cars and trucks.

Developing new products

Reducing the time it takes to bring new vehicles to market

Improving the efficiency of all our plants & processes, and

Building on our teamwork with employees unions, dealers, and suppliers.

Example: Strategic and Financial Objectives

General Electric

To become the most competitive enterprise in the world by being number one or number two in market share in every business the company is in. To achieve an average of 10 inventory turns and a corporate operating profit margin of 16% by 1998.

Examples: Strategic and Financial Objectives

Banc One Corporation

To be one of the top three banking companies in terms of market share in all significant markets we serve.

Dominos Pizza

To safely deliver a hot, quality pizza in 30 minutes or less at a fair price and a reasonable profit.


Exxon

To provide shareholders a secure investment with a superior return.

Alcan Aluminum

To be the lowest-cost producer of aluminum and to outperform the average return on equity of the Standard and Poors industrial stock index.


Bristol-Myers Squibb

To focus globally on those businesses in health and personal care where we can be number one or number two through delivering superior value to the customer.

Atlas Corporation

To become a low-cost, medium-size gold producer, producing in excess of 125000 ounces of gold a year and building gold reserves of 1 500 000 ounces.

Example: Strategic Financial Objectives

3M Corp

Annual growth in earnings per share of 10% or better on average

A return on stockholders equity of 20 25%

A return on capital employer of 27% or better

Have at least 30% of sales come from products introduced in the past four years.

Crafting a strategy

Crafting a strategy:

Involves deciding how to:

Respond to changing buyer preferences

Outcome rivals

Respond to new market conditions

Grow the business over the long term

Achieve performance targets

Strategy is Both Planned and Reactive to Changing circumstances

Planned

Adaptive

Reactions

The Hows That Define a Firms Strategy

How to grow the business

How to please customer

How to out complete rivals

How to respond to changing market conditions

How to manage each functional piece of the business and develop needed organizational capabilities

How to achieve strategic and financial objectives

Crafting a Strategy

The Third Task of Strategic Management

Strategy involves determining whether to Concentrate on a single business or several business (diversification)

Cater to a broad range of customers or focus on a particular niche

Develop a wide or narrow product line

Pursue a competitive advantage based on

- Low cost or

- Product superiority or

- Unique organizational capabilities

Strategy: McDonalds

Strategic PrioritiesContinued growth

Providing

Remaining an efficient and quality producer

Offering high value and good tasting products.

Effectively marketing McDonalds brand on a global scale

Core Elements of Mc Donalds Strategy

Add 2500 restaurants annually

Promote frequent customer visits via attractive menu items, low-price specials and extra value meals

Be highly selective in granting franchises

Locate on sites offering convince to customers and profitable growth potential

Focus on limited menu and consistent quality

Careful attention to store efficiency

Extensive advertising and use of Mc prefix

Hire courteous personnel, pay an equitable wage, provide good training

Crafting strategy is an Exercise in Entrepreneurship

Strategy making is a market- driven and customer driven activity that involves Risk taking and venturesomeness

Innovation and business creativity

Keen eye for spotting market opportunities

Keen observation of customer needs

Choosing among alternatives

Characteristics of Entrepreneurial Managers

Boldly pursue new strategic opportunities

Emphasize out-innovating the competition

Lead the way to improve firm performance

Willing to be first-mover and take risks

Respond quickly and opportunistically to new developments

Devise trail blazing strategies

Why Do Strategies Evolve?

There is always an ongoing need to react toShifting market conditions

Fresh moves of competitions

New technologies

Evolving customer preferences

Political and regulatory changes

New windows of opportunity

Then crisis of the moment

What is a Strategic Plan?

Where firm is headed

Strategic vision and business mission

Short and long term performance

Strategic and financial objectives

Action approaches to achieve targeted results

A comprehensive strategy

Implementing Strategy

The fourth task of Strategic Management

Creating fits between way things are done and what it takes for effective strategy execution

Getting the organization to execute strategy proficiency and efficiently

Producing excellent results in a timely manner

Strategy Implementation

Strategy implementation is an internal, operation-driven activity involving organizing, budgeting, motivating, culture-building, supervising and leading to make the strategy work as intended!

What does strategy implementation include?

Building a capable organization

Allocating resources to strategy-critical activities

Establishing strategy-supportive policies

Motivating people to pursue objectives

Tying rewards to achievement of results

Creating a strategy-supportive corporate culture

Installing needed information, communication, and operating systems

Instituting best practices for continuous improvement

Exerting strategic leadership

Evaluating Performance

The tasks of strategy are not a one-time only exercise

Times and conditions change

Events unfold

Better ways to do things emerge

- New managers with different ideas take over


The tasks of strategy are not a one-time only exercise

Times and conditions change

Events unfold

Better ways to do things emerge

- New managers with different ideas take over


Corrective adjustments Alter long-term direction

Redefine the business

Raise or lower performance objectives

Modify the strategy

Improve strategy execution

Characteristics of the strategic Management Process

Need to perform tasks never goes away

Boundaries among tasks are blurry

Strategizing is not isolated from other managerial activities

Time required comes in lumps and spurts

The big challenge is to get the best strategy supportive performance from employees, perfect current strategy and improve strategy execution

Who Performs the Five Strategic Management Tasks?

Senior corporate level executives

Subsidiary unit managers

Functional area managers

Operating managers

Strategizing an Individual or Group Responsibility?

Teams are increasingly used because Strategic issues cut across departmental lines

Ideas of people with different backgrounds can be tapped into

More people will have an ownership stake in the strategy









Role of Strategic Planners

Gather necessary information

Provide support in revising strategic plans

Coordinate review and approval process

Crystallize strategic issues to be addressed

Conduct studies of industry and competitive conditions

Establish an annual review cycle

Develop strategy performance assessments

Why Planers should not be strategy makers

Managers may toss tough decisions to planners

Planers know less about companys situation

Difficult to fix accountability for poor results

Managers have no buy in to strategy

Strategic planning may be viewed as an unproductive bureaucratic activity

Strategic Management Principle

Strategy making is a job for line managers, not a staff of planners doers should be the strategy-makers!

Strategic Role of a Board of Directors

Continuously audit validity of a companys long-term direction ad strategy

Evaluate strategic leadership skills of the CEO and candidates to succeed the CEO


A board of directors role in the strategic management process is to critically appraise and ultimately approve strategic action plans, but rarely, if ever, to develop the details!

Benefits of Strategic Approach to Managing

Guides entire firm regarding what is we are trying to do and to achieve

Lowers managements threshold to change

Provides basis for evaluating competing budget requests

Unifies numerous strategy-related decisions

Creates a proactive atmosphere

Enhances long range performance

Recap Key Terms

Strategic Vision

A view of an organizations future direction and business course; a guiding concept for what the organization is trying to do and to become

Organization Mission

Represents managements customized answer to the question what is our business and what will it be. A mission statement broadly outlines the organizations future direction ad serves as a guiding concept for what the organization is to do and to become.

Long-range Objectives

Achievement levels to be reached within the next three to five years.

short-range Objectives

Near-term performance target: they establish the pace for achieving the long-range objectives.

Performance Objectives

Organizations targets for achievement: both short and long range objectives are needed


Financial performance targets a company wants to achieve


Targets relating to strengthening a companys overall market position and competitive viability

Strategy

Managerial action plan for achieving organizational objectives; strategy is mirrored in the pattern of moves and approaches devised by management to produce the desired performance. Strategy is the how of pursuing an organizations mission and reaching target objectives.

Strategic Plan

Statement outlining an organizations mission and future direction, near-term and long-term performance targets and strategy, in light of organizations external and internal situations.

Strategy Implementation

Includes the full range of managerial activities associated with putting the chosen strategy into place, supervision its pursuit and achieving the targeted results.

Exercise

Depict the strategic management

Define strategic management

Name the benefits of strategic management

Discipline and sense of responsibility

Name the risks of strategic management

6. Name the three-comptemporary special applications of strategic management discussed in this book.

CHAPTER 2

THE STRATEGY - MAKING TASKS

A strategy is a commitment to undertake one set of actions rather than another

(Sharon M Oster)

Chapter Outline

Developing a strategic vision/mission

Establishing financial and strategic objectives

Crafting a strategy

Factors shaping a companys strategy

Linking strategy with ethics

Approaches to performing the strategy-making task

Developing a Vision or Mission

First direction-setting task

Indicates the long-term course management has charted for the organization Business activities to be pursued

Future market position

Future customer focus

- Kind of company to become

Why have a Mission or Strategic Vision?

Power of a well-conceived strategic vision Guides managerial decision making

Arouses employee buy-in and commitment

Prepares a company for the future

Characteristics of a Strategic Vision

Charts a companys future strategic course Defines the business makeup in 5 to 10 yearsCompany specific, not genetic Provides a company with its own special identity and path to follow The vision is not to make a profit The real mission/vision is what will we do to make a profit?Requires the exercise of management foresight

Elements of a Strategic Vision

Defines present and future Business make up of company

Charts a long-term path to follow

DELTA AIRLINES

we want Delta to be the

WORLD WIDE AIRLINE OF CHOICE

Example: Strategic Vision

DELTA AIRLINES

WORLDWIDE, because we are and intend to remain an innovative, aggressive, ethical and successful competitor that offers access to the world at the highest standards of customer service. We will continue to look for opportunities to extend our reach through new routes and creative global alliances.


DELTA AIRLINES

OF CHOICE, because we have value the loyalty of our customers, employees and investors. For passengers and shippers, we will continue to provide the best service and value. For our personnel, we will continue to offer an evermore challenging, rewarding and result-oriented workplace that recognizes and appreciates their contributions. For our shareholders, we will earn a consistent, superior financial return.


DELTA AIRLINES

AIRLINE, because we intend to stay in the business we know best air transport and related services. We wont stray from our roots. We believe in the long-term prospects for profitable growth in the airline industry and we will continue for focus time, attention and investment on enhancing our place in that business environment

Defining a Companys Business

A good business definition incorporates three factors:

Customer needs WHAT is being satisfied

Customer groups WHO is being satisfied

Technologies used and functions performed HOW customer needs are satisfied

Business Mission: Russell Corp.

Russell Corporation is a vertically integrated international designer, manufacturer and mark of athletic uniforms, and a comprehensive of lightweight, yarn-dyed woven fabrics

The companys manufacturing operations include the entire process of converting raw fibers into finished apparel and fabrics

Products are marketed to sporting goods dealers, department and specially stores, mass merchandisers and other apparel manufacturers

Business Mission: McDonalds

Serving a limited menu of hot, tasty food quickly in a clean, friendly restaurant for a good value to a broad base of fast-food customers worldwide

McDonalds serves approximately 30 million customers daily at 20.000-plus restaurants in over 90 countries

Broad Narrow Mission Statements?

Narrow enough to specify real arena of interest

Serve as

Boundary for what to do and not do

Beacon of where top management intends to take firm

Diversified companies employ broader business definitions

Definitions: Broad-Narrow scope

Mission Statement of a Diversified Firm

TIMES MIRROR CORPORATION

Times mirror is a media and information company principally engaged in newspaper publishing, book, magazine and other publishing and cable and broadcast television

Mission Statements for Functional Departments

Spotlights Departments Contribution to firms mission/vision/objectives

Role and scope of activities

Direction which department needs to pursue

Mission Statements of Functional Departments

Human Resources

To contribute to organizational success by developing effective leaders, creating high performance teams and maximizing the potential of individuals

Corporate Security

To provide service for the protection of corporate personnel and assets through preventive measures and investigations

Intels Strategic Inflection Points

Pre-mid 1980sBusiness focus was memory chips Post-mid 1980sAbandon memory chip business

Adopt new strategic vision

Become preeminent supplier of microprocessors to PC industry

Make PC central appliance in workplace and home

Be undisputed leader in driving PC technology forward

Decision Time:What will the Vision Be?Entrepreneurial challenge

Creatively preparing a company for the future Astute strategists focus on Shifting customer needs

New technologies

Attractive foreign markets

Growing or shrinking opportunities

Decision Time:What will the Vision Be?Entrepreneurial challenge

Creatively preparing a company for the future Astute strategists focus on Shifting customer needs

New technologies

Attractive foreign markets

Growing or shrinking opportunities

Communicating the Vision

An exciting, inspirational vision Inspires, challenges and motivates workforce

Arouses strong sense of organizational purpose and induces employee buy-in

Brings workforce together and galvanizes people to live the business

Managerial Value: Strategic Vision and Mission

Crystallizes long-term direction Reduces risk or rudderless decision-making Conveys organizational purpose and identity

Keeps direction-related actions of lower-level managers on common path

Helps organization prepare for the future

Establishing Objectives

Second Direction-Setting Task

Represent commitment to achieve specific performance targets by a certain time

Must be stated in quantifiable terms and contain a deadline for achievement

Spell-out how much of what kind of performance by when

Purpose of Objectives

Substitutes results-oriented decision-making for aimlessness over what to accomplish

Provides benchmarks for judging organizational performance


Companies whose managers set objectives for each key result area and then press forward with actions aimed directly at achieving these performance outcomes typically outperform companies while managers exhibit good intentions, try hard and hope for the best!

Types of Objectives Required


Outcomes that improve a firms financial performance


Outcomes that strengthen a firms competitiveness and long-term market position


Every company needs bothstrategic and financial objectives!

Examples: Financial Objectives

Achieve revenue growth of 10% per year

Increase earnings by 15% annually

Increase dividends per share by 5% per year

Increase net profit margins from 2% to 4%

Attractive EVA performance

Stronger bond and credit ratings

A rising stock price (outperform the S&P 500)

Attractive increases in MVA

Recognition as a blue chip company

A more diversified revenue base

Examples: Strategic Objectives

A bigger market share

Quicker design-to-market times than rivals

Higher product quality than rivals

Lower costs relative to key competitors

Broader product line than rivals

A stronger reputation with customers than rivals

Better customer service than rivals

Recognition as a leader in technology

Wider geographic coverage than rivals

More innovative products than rivals

Corporate Objectives: McDonalds

To achieve 100 percent total customer satisfaction everyday in every restaurant for every customer

Corporate Objectives: 3M Corporation

30 percent of the companys annual sales must come from products fewer than four years old.

Corporate Objectives: Anheuser-Busch

To make all our companies leaders in their industries in quality while exceeding customer expectations

To achieve a 50% share of the U.S beer market

To establish and maintain a dominant leadership position in the international beer market

To provide all our employees with challenging and rewarding work, and opportunities for personal development, advancement and competitive compensation

To provide our shareholders with superior returns by achieving double-digit annual earnings per share growth

Corporate Objectives: McCormick & Co.

To achieve a 20 percent return on equity

To achieve a net sales growth rate of 10 percent per year

To maintain an average earnings per share growth rate of 15 percent per year

To maintain total debt-to-total capital at 40 percent or less

To pay out 25% to 35% of the net income in dividends

Strategic or Financial Objectives

Which Take Precedence?

Pressure for better short-term financial performance become pronounced when Firm is struggling financially

Resource commitments for new strategic initiatives may hurt bottom-line for several years

Proposed strategic moves are risky

A firm that consistently passes up opportunities to strengthen its long-term competitive position Risks diluting its competitiveness

Risks losing momentum in its markets

- Can hurt its ability to fend off rivals challenges


Building a stronger long-term competitive position benefits shareholders more lastingly than improving short-term profitability!

The Concept of Strategic Intent

A Company exhibits Strategic Intent when it relentlessly pursues an ambitious strategic objective and concentrates its competitive actions and energies on achieving that objective!

The Concept of Strategic Intent

Indicates firms intent to stake out a particular position over the long-term

Serves as a rallying cry for employees to do their very best

Signals deep-seated commitment to winning

Short-Ranger and Long-Ranger Objectives

Short-range Objectives

Targets to be achieved soon

Serve as star steps for reaching long-range performance

Long Range Objectives

Targets to be achieved within 3 to 5 years

Prompt actions now that will permit reaching targeted long-range performance later

Objectives are needed at all Levels

Process is top-down, not bottom-up

First, establish organization-wide objectives

Next, set business and product line objectives

Then, establish functional and departmental objectives

Individual objectives come last


Objectives-setting needs to be more of a top-down than a bottom-up process in order to guide lower-level managers and organizational units toward outcomes that support the achievement of overall business and company objectives.

Crafting a Strategy

Third Direction Setting Task

An organization's strategy deals withHow to make management's strategic vision a reality

The game plan for

Moving the company into an attractive business position

Building A sustainable competitive advantage

Strategizing is How to

Achieve performance targets

Out-compete rivals

Achieve sustainable competitive advantage

Strengthen firms long-term competitive position

Make the strategic vision a reality

Fig. 2-1(a): Level of Strategy-Making:

A Diversified Company

Corporate level Managers

Two-way influence

Business-level Managers

Two-way influence

Functional-level Managers

Two-way influence

Operating-level Managers

Fig. 2-1(a): Level of Strategy-Making: A Single Business Company

Executive-level Managers

Two-way influence

Functional-level Managers

Two-way influence

Operating-level Managers

Characteristics of strategy - Making

Action oriented

Evolves over time

A never-ending, ongoing task

Corporate Strategy for a Diversified Company

Tasks of Corporate Strategy

Moves to achieve diversification

Actions to boost of individual businesses

Capturing synergy among business units 2+2=5 effects!

Establishing investment priorities and steering corporate resources into the most attractive business units

Strategy Components of a Single-Business Company

What Business Strategy Involves

Forming responses to changes in industry and competitive conditions, buyer needs and preferences, economy, regulations etc

Crafting competitive moves leading to sustainable competitive advantage

Building competitively valuable competencies and capabilities

Uniting strategic initiative of functional areas

Addressing strategic issues facing the company

Functional Strategies

Game plan for a strategically-relevant function, activity or business process

Details how key activities will be managed

Provide support for business strategy

Specify how functional objectives are to be achieved

Operating Strategies

Concern narrower strategies for managing grassroots activities and strategically-relevant operating units

Add detail to business and functional strategies but of lesser scope

Example: Operating Strategy

Boosting Worker Productivity

To boost productivity by 10%, managers of firm with low-price, high-volume strategy take following actions Recruitment manager develops selection process designed to weed out all best-qualified candidates

Information systems manager devises way to use technology to boost productivity of office workers

Compensation manger devises improved incentive compensation plan

Purchasing manager obtains new efficiency

Increasing tools and equipment

Example: Operating Strategy

Improving Delivery & Order-Filling

Manufacturer of plumbing equipment emphasizes quick delivery and accurate order-filling as keystones of its customer service approach

Warehouse manager took following approaches:

Inventory stocking strategy allowing 99% of all orders to be completely filled without backordering any item

Staffing strategy of maintaining workforce capability to ship any order within 24hrs

Uniting the Companys Strategy Making Effort

A companys strategy is a collection of strategies and initiatives

Separate levels of strategy must be unified into a cohesive company-wide action plan

Pieces of strategy should fit together like puzzle pieces

Networking of Missions, Objectives and Strategies

Level 1

Corporate level managers

Two way influence Two way influence Two way influence

Level 2

Business level managers

Two way influence Two way influence Two way influence

Level 3

Functional level managers

Level 4 Two way influence Two way influence Two way influence

Plant managers, lower

Level supervisors


Objectives and strategies that are unified from top to bottom of the strategy-making managerial hierarchy require a team effort

Factors Shaping the Choice of Company Strategy

External Factors

Internal Factors

Social, Political, Regulatory, and Citizenship Factors

Pressures from special interest groups

Glare of investigative reporting

Health and nutrition concerns

Concerns about alcohol and drug abuse

Sexual harassment

Corporate downsizing

Impact of plant closings on communities

Rising/falling interest rates

Recessionary economy conditions

Trade restrictions, tariffs and import quotas

Corporate Social Responsibility

Conduct company activities within bounds of what is considered ethical and in interest

Respond positively to emerging societal priorities and expectations

Demonstrate willingness to take needed action ahead of regulatory confrontation

Balance stockholder interests against larger interest of society as a whole

Be a good citizen in community

Competitive Conditions and Industry Attractiveness

A companys strategy has to be responsive to Fresh moves of rival competitors

Changes in industrys price-cost-profit economics

Shifting buyer needs and expectations

New technological developments

Pace of market growth


A companys strategy cant produce real market success unless it is well-matched to industry and competitive conditions

Company Opportunities and Threats

For strategy to be successful, it has to be well matched to

A companys opportunities

Threats to the companys well-being

Company Strengths, Competencies, and Competitive Capabilities

A company must have or be able to acquire the resources, competencies and competitive capabilities needed to execute the chosen strategy

Resource defiance's, gaps in skills, and weaknesses in competitive position make pursuit of certain strategies risky or altogether unwise


A companys strategy ought to be grounded in its resource strengths and in what it is good at doing (its competencies and competitive capabilities): it is perilous to craft a strategy whose success is depended on resources and capabilities that a company lacks!

Ambitions, Philosophies and Ethics of Key Executives

Managers generally stamp strategies they craft with their own personal

Ambitions

Values

Business philosophies

Attitudes toward risk

Ethical beliefs

Shared Values and Company Culture

Values and culture can dominate strategic moves a company will Consider

Reject

A company should not undertake strategic moves which conflict with Its culture

Values widely shared by managers and employees

Hewlett-Packards Basic Values: The HP Way

Sharing firms success with employees

Showing trust and respect for employees

Providing customers with products/services of the greatest value

Being genuinely interested in providing customers with effective solutions to their problems

Making profit a high stockholder priority

Avoiding use of long-term debt to finance growth

Individual initiative, creativity & teamwork

Being a good corporate citizen

Linking Strategy with Ethics

Ethical and moral standards to beyond Prohibitions of law and

Language of thou shalt not to

Issues of duty and

- Language of should and should not do

Ethical Responsibilities of Firm to Stakeholders

Owner/shareholders expect some form of return on their investment

Employees expect reliable, safe product or service

Suppliers expect equitable relationship with firm

Community expect businesses to be good citizens in their community


To be a real winner, a strategy must

Fit the enterprises situation

Build sustainable competitive advantage

Improve company performance

Tests of a Winning Strategy

Goodness of Fit Test How well is strategy matched to firms situation?Competitive advantage test Does strategy lead to sustainable competitive advantage?Performance Test

Does strategy boost firm performance

Tests of a Winning Strategy

Goodness of Fit Test How well is strategy matched to firms situation?Competitive advantage test

- Does strategy lead to sustainable competitive advantage?

Performance Test

- Does strategy boost firm performance

Strategic management

To be a real winner, a strategy must:

Fit the enterprises situation

Build sustainable competitive advantage

Improve company performance

Approaches to Performing the Strategy-Making Task

Master Strategist

Manager personally functions as chief strategist

Delegate it to others

Manager delegates strategy-making to others

Collaborative

Manager enlists help of key subordinates in hammering out consensus strategy

Champion

Manager encourages subordinates to develop and implement strong strategies

Looking Back

What is a Vision Statement?

What are the components of the mission statement?

In what way is strategic intent related to both the mission and the vision statement?

Do all companies require both financial and strategic objectives?

Why should a companys strategy match industry competitive conditions?

Key Terms

Vision/mission - Corporate StrategyBroad Narrow Mission Statement - Functional Strategy

Financial Objectives - Operating Strategy

Strategic Objectives - Key Executives

Crafting a Strategy - Ethical responsibility

Chapter 3

INDUSTRY AND COMPETITIVE ANALYSIS

Analysis is the critical starting point of strategic thinking.(Kenichi Ohmae)

Chapter Outline

Role of situation analysis in strategy-making

Methods of industry and competitive analysis

Industrys competitive forces

Industrys competitive forces

Drivers of industry change

Competitive positions of rivals

Competitive moves of rivals

Key success factors

Conclusions: overall industry attractiveness

Conducting an industry and competitive analysis

What is Situation Analysis

Focuses on two considerations A companys EXTERNAL or MACRO-ENVIRONMENT Industry and competitive conditionsA companys INTERNAL or MICRO ENVIRONMENTIts competencies, capabilities, resource, strengths and weakness and competitiveness

Good Situation Analysis Leads to Good Strategic Choices

Key Considerations Regarding the External Environment

Industrys dominant economic traits

Competitive forces and strength of each force

Predicting the moves of competitors

Drivers of change in the industry

Conclusions about industry attractiveness

Question 1: What are the Industrys Dominant Economic Traits?

Market size and growth rate

Scope of competitive rivalry (height, intensity)

Number of competitors and their relative sizes.

Prevalence of backward/forward integration

Entry /exit barriers

Nature and pace of technological change

Product and customer characteristics

Scale economies and experience curve effects

Capacity utilization and resource requirements

Industry profitability

The Experience Curve Effect

An experience curve exists when unit costs decline as cumulative production volume increase because of

- Accumulating production know how

- Growing mastery of the technology

The bigger the experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume.

Cost Advantages of Different Experience Curve Effects

Cost per Unit

1 2 4 8

Million Million Million Million

Units Units Units Units

Question 2: What is Competition like & how strong are the Competitive Forces?

Objective

To identify Main sources of competitive forces

Strength of these forces

Key analytical tools Five forces models of competition

Five Forces Model of Competition

.

Analyzing the Five Competitive Forces: How to do it

Asses strength of each competitive force

Rivalry among competitors

Substitute products

Potential entry

Bargaining power of buyers

Explain how each force acts to create competitive pressure.

Decide whether overall competition is brutal fierce, strong, normal/moderate, or weak

Rivalry among Competing sellers

Usually the most powerful of the five forces

Check which weapons of competitive rivalry are most actively used by rivals in jockeying for position

Price

Quantity

Performance features offered

Customer service

Warranties / guarantees

Advertising / promotions

Dealer networks

Product innovation

What Causes rivalry to be stronger?

Lots of firms, more equal in size and capability

Slow market growth (competing for a small market)

Industry conditions tempt some firms to go on the offensive to boost volume and market share

Customers have low costs in switching brands

One or more firms initiates moves to bolster their standing at expense of rivals

A successful strategic move carries a big payoff

Cost more to get out of business than to stay in

Firms have diverse strategies, corporate priorities resources, and countries of origin.

Principle of Competitive Markets

Competitive jockeying among rival firms is dynamic and ever changing

As industry members initiate new offensive and defensive moves

As emphasis swings from one mix of competitive weapons to another


Competitive jockeying among rival firms is dynamic and ever changing

As industry members initiate new offensive and defensive moves

As emphasis swings from one mix of competitive weapons to another

Competitive Force of Potential Entry

Seriousness of threat depends on Barriers to entry

Reaction of existing firms to entry

Barriers exist whenNewcomers confront obstacles

Economic factors put potential entrant at a disadvantage relative to incumbent firms

Common Barriers to Entry

Economic of scale

Inability to gain access to specialized technology

Existence of learning/experience curve effects

Strong brand preferences and customer loyalty

Capital requirements and/or other specialized resource requirements

Cost disadvantages independent of size

Access to distribution channels

Regulatory policies, tariffs, trade restrictions


Threat of entry is stronger when

Entry barriers are low

Sizeable pool of entry candidates exists

Incumbents are unwilling or unable to contest a newcomers entry efforts

Newcomer can expect to earn attractive profits

How to tell whether substitute Products are a strong forces

Sales of substitutes are growing rapidly

Producers of substitutes are planning to add new capacity

Their profits are up

Competitive Force of Suppliers

Suppliers are a strong competitive force when:Item makes up large portion of products costs is crucial to production process and or significantly affects products quality

It is costly for buyers to switch suppliers

They have good reputations and growing demands

They can supply a component cheaper than industry members can make it themselves

They do not have to contend with substitutes

Buying firms are not important customers

Competitive Force of Substitute Products

Concept

Substitutes matter when customers are attracted to the products of firms in other industries

Examples

Eyeglasses vs. contact lens

Sugar vs. glass vs. metal vs. wood

Newspapers vs. TV Internet

Transport vs. Letters


The competitive threat of substitutes is stronger when they are:

Readily available

Attractively priced

Believed to have comparable or better performance features

Customer switching costs are below


Suppliers are a stronger force the more they can exercise power over:

Price charged

Quality/performance or items supplied

Amounts and delivery times

Competitive Force of Buyers

Buyers are a stronger competitive force when They are large and purchase a sizeable percentage of industrys product

They buy in volume quantities

They can integrate backward

Industrys product is standardized

Their costs in switching to substitutes or other brands are low

They can purchase from several sellers

Product purchased does not save buyer money


Buyers are a stronger competitive force the more they have leverage to bargaining over:

Price

Quality

Service

Other terms and conditions of sale

Strategic Implications of the Five Competitive Forces

Competitive environment is unattractive when: Rivalry is strong

Entry barriers are low

Competition from substitutes is strong

Suppliers and customers have considerable bargaining power

Coping with the Five Competitive Forces

Objective is to craft a strategy that will: Insulate firm from competitive forces

Influence competitive pressures in ways that favor company

Build a sustainable competitive advantage

Strategic Implications of the Five Competitive Forces

Competitive environment is ideal when:Rivalry is moderate

Entry barriers are high

Good substitutes do not exist

- Suppliers and customers are in a weak bargaining position

Question 3: What Forces are at Work to Change Industry Conditions?

Industries change because forces are driving industry participants to alter their actions

Driving forces are the major underlying causes of changing industry and competitive conditions

Analyzing Driving Forces

Identify those forces likely to exert greatest influence over next 1 3 years Usually no more that 3 4 factors qualify

Assess impact

What differences will the forces (favorable? Unfavorable?)

Common Types of Driving Forces

Changes in low-term industry growth rate

Changes in who buys the product and how they use it

Product innovation

Technological change/process innovation

Marketing innovation

Entry or exit of major firms

Diffusion of technical knowledge

Common Types of Driving Forces

Increasing globalization of industry

Changes in cost and efficiency

Market shift from standardized to differentiated products (or vice versa)

New regulatory policies and/or government legislation

Changing societal concerns, attitudes and lifestyles

Changes in degree of uncertainty and risk

Question4: Which Companies are in Strongest/Weakest Positions?

One technique for revealing the different competitive positions of industry rivals is strategic group mapping

A strategic group consists of those rivals with similar competitive approaches in an industry

Environmental Scanning

Definition

Monitoring and interpreting sweep of social political, economic, ecological and technical events to spot budding trends that could eventually impact industry

Purpose

Raise consciousness of managers and potential developments that could Have important impact on industry conditions

Pose new opportunities and threats

Strategic Group Mapping

Firms in same strategic group have two or more competitive characteristics in common:Sell in same price/quality range

Cover same geographic areas

Be vertically integrated to same degree

Have comparable product line breadth

Emphasize same types of distribution channels

Offer buyers similar services

Use identical technological approaches

Procedure: Constructing a Strategic Group Map

Step 1: Identify competitive characteristics that differentiate firms in an industry from one another

Step 2: Plot firms on a two-variable map using pairs of these differentiating characteristics

Step 3: Assign firms that fall about the same strategy space to same strategic group

Step 4: Draw circles around each group, making circles proportional to size of groups respective share of total industry sales

Guidelines: Strategic Group Maps

Variables selected as axes should not be highly correlated

Variables chosen as axes should expose big differences in how rivals compete

Variables do not have to be either quantitative or continuous

Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group

If more than two good competitive variables can be used, several maps can be drawn

Interpreting Strategic Group Maps

Driving forces and competitive pressures often favor strategic groups and hurt others

Profit potential of different strategic groups varies to strengths and weaknesses in each groups market position

The closer strategic groups are on map, the stronger the competitive rivalry among member firms tends to be

Question 5: What Strategic Moves are Rivals likely to make next?

A firms own best strategic moves are affected by Current strategies of competitors

Actions competitors are likely to take next

Profiling key rivals involves studying

Current position in industry

Strategic objectives

Basic competitive approaches

Competitor Analysis

Successful strategists take pains in scouting competitors Understanding their strategies

Watching their actions

Evaluating their vulnerability to driving forces and competitive pressures

Sizing up their resource strengths and weaknesses and their capabilities

Trying to anticipate rivals next moves

Predicting Moves of Rivals

Predicting rivals next moves involves Analyzing their current competitive positions

Examining public pronouncements about what it will take to be successful in industry

gathering information from grapevine about current activities and potential changes

Studying past actions and leadership

- Determining who has flexibility to make major strategic changes and who is locked into pursuing same basic strategy

Question 6: What are the Key Factors for Competitive Success?

KSFs are competitive elements that most affect every industry members ability to prosper in the market place Specific strategy elements

Product attributes

Resources

Competencies

Competitive capabilities

KSFs spell difference between

Profit and loss

Competitive success or failure

Identifying Industry Key Success Factors

Answers to three questions pinpoint KSFs On what basis do customers choose between competing brands of sellers?

What must a seller do to be competitively successful what resources and competitive capabilities does it need?

What does it take for sellers to achieve a sustainable competitive advantage?

KSFs consist of the 3 5 really major determinants of financial and competitive success in an industry

Common Types of Key Success Factors

Technology related

Manufacturing related

Distribution related

Marketing related

Skills related

Organizational related

Others

Example: KSFs for Beer Industry

Utilization of brewing capacity to keep manufacturing costs low

Strong network of wholesale distributors to gain access to retail

Clever advertising to induce beer drinkers to buy a particular brand

Example: KSFs for Apparel Manufacturing Industry

Fashion design to create buyer appeal

Low cost manufacturing efficiency to keep selling prices competitive

Example: KFs for Tin and Aluminum Can Industry

Locating plants close to end-use customers to keep costs of shipping empty cans low

Ability to market plant output within economical shipping distances


A sound strategy incorporates efforts to be competent on all industry key success factors and to excel on at least one factor!

Question 7: Is the Industry Attractive or Unattractive and Why?

Objective

Develop conclusions about whether the industry and competitive environment is attractive or unattractive, both near and long-term, for earning good profits

Principle

Firms uniquely well-suited in an otherwise unattractive industry can, under certain circumstances, still earn unusually good profits

Things to Consider in Assessing Industry Attractiveness

Industrys market size and growth potential

Whether competitive conditions are conducive to rising/falling industry profitability

Will competitive forces become stronger or weaker

Whether industry will be favorably impacted by driving forces

Potential for entry/exit of major firms

Stability/dependability of demand

Severity of problems facing industry

Degree of risk and uncertainty in industrys future

Conducting an Industry and Competitive Situation Analysis

Two things to keep in mind:

Evaluating industry and competitive conditions cannot be reduced to a formula-like exercise-thoughtful analysis is essential

Sweeping industry and competitive analyses to be done every 1 to 3 years

Looking Back

What is the meaning of an opportunity and a threat in terms of external environmental analysis?

What are the five interrelated activities of a continuous process of external environmental analysis?

What are the five environmental segments of the macro environment?

What are Michael Porters Five Forces that he identified as important when doing industry analysis?

What aspects can be regarded as entry barriers?

What are the specific conditions that contribute to intense competition among existing competitors?

When are suppliers powerful?

When do buyers have bargaining power?

What are key success factors?

Key Terms

Opportunity - Political environment

Threat - Social environment

Economic environment - Technological

Industry Analysis - Key success Factors

Market environment

CHAPTER 4

EVALUATING COMPANY RESOURCES AND COMPETITIVE CAPABILITIES

Understand what really makes a company tick (Charles R Scott)

If a Company is not best in the world at a critical activity, it is sacrificing competitive advantage by performing that activity with its existing techniques (James Brian Quinn)

Chapter Outline

Determining how well the companys present strategy is working

SWOT Analysis

Resources strengths and weaknesses

Opportunities and threats facing firm

Strategic cost analysis and value chains

Assessing firms competitive position

Identifying strategic issues

Company Situation Analysis: The Key Questions

How well is firms present strategy working?

What are the resource strengths and weaknesses and its external opportunities and threats?

Are firms prices and costs competitive?

How strong is firms competitive position relative to rivals?

What strategic issues does firm face?

Question 1: How well is the Present Strategy Working?

Two steps involved

Determine current strategy of company

Examine key indicators of strategic and financial performance

What is the Strategy

Identify competitive approach Low-cost leadership

Differentiation

Focus on a particular market niche

Determine competitive scope Stages of industrys production/distribution chain

Geographic coverage

Customer base

Identify functional strategies

Examine recent strategic moves

Key Indicators of How Well the Strategy is Working

Trend in market share

Trend in profit margins

Trend in net profits, return on investment and EVA

Trend in sales growth

Credit ranking

Trend in stock price and stockholder value

Leadership role(s) technology, quality etc

Competitive advantages or disadvantages

Question 2: What are the firms strengths, Weaknesses, Opportunities and threats?

SWOT represents the first letter in Strengths

Weaknesses

Opportunities

Threats

Strategy-making must be well-matched to both A firms resource strengths and weaknesses

- A firms best market opportunities and external threats to its well-being

Identifying Resource Strengths and Competitive Capabilities

A strength is something a firm does well or a characteristic that enhances its competitiveness Valuable competencies or know how

Valuable physical assets

Valuable human assets

Valuable organizational assets

Valuable intangible assets

Important competitive capabilities

An attribute that places a company in a position of market advantage

Alliances or cooperative ventures

SWOT Analysis What to Look for

Potential Resource strengths Potential Resource Weaknesses Potential Company Opportunities

Potential External threats

Identifying Resource Weaknesses and Competitive Deficiencies

A weakness is something a firm lacks, dies poorly, or a condition placing it at a disadvantage

Resource weaknesses relate to

Deficiencies in know-how or expertise or competencies

Lack of important physical, organizational or intangible assets

Missing capabilities in key areas

Competencies vs. Core Competencies vs. Distinctive Competencies

A competence is an internal activity that a company performs better than other internal activities

A core competence is a well-performed internal activity that is central not peripheral to a companys strategy, competitiveness and profitability

A distinctive competence is a competitively valuable activity that a company performs better than its rivals

Core Competencies: A Valuable Company Resource

A competence becomes a core competence when the well-performed activity is central to the companys strategy, competitiveness and profitability

Often a core competence results from collaboration among different parts of an organization

Typically, core competencies reside in a companys people not in its assets on the balance sheet

A core competence gives a company a potentially valuable competitive capability

Types of Core Competencies

Skills in manufacturing a high quality product

System to fill customer orders accurately and swiftly

Fast development of new products

Better after-sale service capability

Superior know-how in selecting good retail locations

Innovativeness in developing popular product features

Merchandising and product display skills

Expertise in an important technology

Expertise in integrating multiple technologies to create whole families of new products

A Distinctive Competence A Competitively Superior Resource

A distinctive competence is a competitively significant activity that a company performs better than its competitors

A distinctive competence represents a competitively superior resource strength

A distinctive competence

Represents a competitively valuable capability that rivals do not have

Has potential for being a cornerstone of strategy

Can provide a competitive edge in the marketplace


A Distinctive competence empowers a company to build competitive advantage


A Distinctive competence empowers a company to build competitive advantage

Examples: Distinctive Competencies

Sharp Corporation Expertise in flat-panel display technology Toyota, Honda, Nissan Low cost, high-quality manufacturing capability and short design-to-market cycles Intel Ability to design and manufacture ever more powerful microprocessors for PCs Motorola Defect-free manufacture (six-stigma quality) of cell phone

Determining the Competitive Value of a Company Resource

There are 4 tests of whether a resource has real potential for producing sustainable competitive advantage

Is the resource hard to copy?

Does the resource have staying power is it durable?

Is the resource really competitively superior?

Can the resource be trumped by the different capabilities of rivals?


Successful strategies seek to capitalize on a companys resource strengths its expertise, core competencies, and strongest competitive capabilities

Identifying a Companys Market Opportunities

The market opportunities most relevant to a company are those offering The best prospects for profitable long-term growth

Comparative advantage

- Good match with its financial and organizational resource capabilities


A company is well advised to pass on a particular market opportunity unless it has, or can build the resource capabilities to capture it!

Identifying External Threats

Emergence of cheaper/better technologies

Introduction of better products by rivals

Intensifying competitive pressures

Onerous regulations

A rise in interest rates

Potential of a hostile takeover

Unfavorable demographic shifts

Adverse shifts in foreign exchange rates

Political upheaval in a country/unrest


Successful strategists aim at capturing a companys best growth opportunities and creating defenses against external threats to its competitive position and future performance!

Role of SWOT Analyzing Crafting a Better Strategy

Developing a clear understanding of a companys Resource strengths

Resource opportunities

Best opportunities

External threats

Drawing conclusions about how best to deploy resources in light of the companys internal and external situation

Thinking strategically about how to strengthen the companys resources base for the future

Question 3: Are the Companys Prices and Costs Competitive?

Assessing whether a firms costs are competitive with those of rivals is a crucial part of company analysis

Key analytical tools

Strategic cost analysis

Value chain analysis

Benchmarking

Why Rival Companies have Different Costs

Companies do not have the same costs because of differences in Prices paid for raw materials, component parts, energy and other supplier resources

Basic technology and age of plant & equipment

Economies of scale and experience curve effects

Wage rates and productivity levels

Marketing, promotion, and administration costs

Inbound and outbound shipping costs

- Forward channel distribution costs


The higher a companys costs are above those of close rivals, the more competitively vulnerable it becomes!

What is Strategic Cost Analysis?

Focuses on a firms costs relative to its rivals

Compares a firms costs activity by activity against costs of key rivals

From raw materials purchase to

Price paid by ultimate customer

Pinpoints which internal activities are a source of cost advantage or disadvantage

The Value Chain Concept

Identifies the separate activities and business processes performed to design, produce, market, deliver and support a product/service

Consists of two types of activities

Primary activities

Support activities

Typical Company Value Chain

Primary Activities

Support

Activities

& Costs

Activity-Based Costing: A Key Tool on Strategic Cost Analysis

Determining whether a companys cost are in line with those of rivals requires measuring how a companys costs with those of rivals activity-by-activity from one end of the value chain to the other

This requires having accounting data that measures the cost of each value chain activity

Activity-based accounting systems provide a way of measuring costs for each relevant value chain activity

Traditional Cost Accounting Vs Activity-Based Costing

Benchmarking the Costs of Key Value Chain Activities

Focuses on cross-company comparisons of how well activities are performed Purchase of materials

Payment of suppliers

Management of inventories

Training of employees

Processing of payrolls

Getting new products to market

Performance of quality control

Filling and shipping of customer orders

Objectives of Benchmarking

Determine whether a company is performing particular value chain activities efficiently

Understand the best practices in performing an activity

Assess if costs are in line with competitors

Learn how lower costs are achieved

Take action to improve cost competitiveness

Ethical Standards in Benchmarking: Dos and Donts

Avoid talk about pricing or competitively sensitive costs

Dont ask for sensitive data

Dont share proprietary data without clearance

Have impartial third party assemble and present competitive data with no names attached

Dont disparage a rivals business to outsiders based on data obtained

What Determines Whether a Company is Cost Competitive?

A companys cost competitiveness depends on how well managers its value chain relative to competitors

Three areas contribute to cost differences

Suppliers activities

The companys own internal activities

Forward channel activities

The Value Chain System

Assessing a companys cost competitiveness involves comparing costs all along the industrys value chain

Suppliers value chains are relevant because

Costs, quality and performance of inputs provided by suppliers influence a firms own costs and product performance Forward channel allies value chains are relevant because Forward channel allies costs and margins are part of price paid by ultimate end-user

- Activities performed affect end-user satisfaction

The Value Chain System

Upstream A Companys Downstream

Value Chains Own Value Chain

Value Chain

Activities, Internally Performed Activities, Costs & Buyer/User

Costs, & Activities, Costs Margins of Forward Value Chains

Margins of Margins Channel Allies &

Supplier Strategic Partners

Example: Key Value Chain Activities

PULP & PAPER INDUSTRY

Timber farming

Logging

Pulp mills

Paper making

Printing & Publishing


SOFT DRINK INDUSTRY

Processing of basic ingredients

Syrup manufacture

Bottling and can filing

Wholesale distribution

Retailing


HOME APPLIANCE INDUSTRY

Parts & components manufacture

Assembly

Wholesale distribution

Retail sales


COMPUTER SOFTWARE INDUSTRY

Programming

Disk loading

Marketing

Distribution

Correcting Supplier-Related Cost Disadvantages: The Options

Negotiate more favorable prices with suppliers

Work with suppliers to help them achieve lower costs

Integrate backward

Use lower-priced substitute inputs

Do a better job of managing linkages between suppliers value chains and firms own chain

Make up difference by initiating cost savings in other areas of value chain

Correcting Forward Channel Cost Disadvantages: The Options

Push for more favorable terms with distributors and other forward channel allies

Work closely with forward channel allies and customers to identify win-win opportunities to reduce costs

Change to a more economical distribution strategy

Make up difference by initiating cost savings earlier in value chain

Correcting Internal Cost Disadvantages: The Options

Reengineer how the high-cost activities or business processes are performed

Eliminate some cost-producing activities altogether by revamping value chain system

Relocate high-cost activities to lower-cost geographic areas

See if high cost activities can be performed cheaper by outside vendor/suppliers

Invest in cost-saving technology

Simplify product design

Make up difference by achieving savings in backward or forward portions of value chain system

From Value Chain Analysis to Competitive Advantage

The Strategy making lesson of value chain analysis:

Sustainable competitive advantage can be created by

Managing value chain activities better than rivals and

Developing distinctive capabilities to serve customers!

From Value Chain Analysis to Competitive Advantage

A company can create competitive advantage by managing its value so as to Integrate the knowledge and skills of employees in competitively valuable ways

Leverage economies of learning / experience

Coordinate related activities in ways that build valuable capabilities

Build dominating expertise in a value chain activity critical to customer satisfaction or market success

Question 4: How Strong is the Companys Competitive Position?

Can be firms position be expected to improve or deteriorate present strategy is continued

How the firm ranks relative to key rivals on each industry KSF and relevant measure of competitive strength

Whether the firm has a sustainable competitive advantage or disadvantage

Ability of firm to defend its position in light of

Industry driving forces

Competitive pressures

Anticipated moves of rivals

Assessing A Companys Competitive Strength versus Key Rivals

List industry key success factors and other relevant measures of competitive strength

Rate firm and key rivals on each factor using rating scale of 1 10 (1 = weak; 10 = strong)

Decide whether to use a weighted or unweighted rating system

Sum individual ratings to get overall measure of competitive strength for each rival

Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage

Why Do a Competitive Strength Assessment?

Reveals strength of firms competitive position

Shows how firm stacks up against rivals measure-by-measure pinpoints the companys competitive strengths and competitive weaknesses

Indicates whether firm is at a competitive advantage/ disadvantage against each rival

Identifies possible offensive attacks (pit company strengths against rivals weaknesses)

Identifies possible defensive actions (a need to correct competitive weaknesses)

Question 5: What Strategic Issues does the Company Need to Address?

What should management be worried about what items should be on the companys worry list?

Requires thinking strategically about

The pluses and minuses in the industry and competitive situation

The companys resource strengths and weaknesses and the attractiveness of its competitive position

A good strategy must address each and every strategic issue!

Identifying the Strategic Issues

Is present strategy adequate in light of competitive pressures and driving forces?

Is the strategy well matched to the industrys key success factors?

Does the company need new or different resource strengths and competitive capabilities

Does present strategy adequately protect against external threats and resource deficiencies?

Is firm vulnerable to competitive attack by rivals?

Where are strong/weak spots in present strategy?

Stating the Issues Clearly and Precisely

A well stated issue involves such phrases as What should be done about ?

How to ..?

Whether to ..?

Should we ?

Issues need to be precise, specific and cut straight to the chase

Issues raise questions about

What actions need to be considered?

What to think about doing

Criticisms of the SWOT Analysis

It generates lengthy lists

It uses no weight to reflect priorities

It uses ambiguous words and phrases

The same factor can be placed in two categories (e.g. a strength may also be a weakness)

There is no obligation to verity opinions with data or analysis

There is no logical link to strategy implementation

SWOT Analysis by itself, is not a panacea

Looking Back

What is the meaning of the acronym SWOT?

Explain the relationship between resources and organizational capabilities, SWOT analysis and strategic competitiveness.

The activities in the value chain are grouped into which two categories?

What are the limitations of the SWOT analysis?

What are the characteristics that make a resource valuable?

What is strategic intent?

Why is it important for a company to keep track of its competitors costs?

What are common types of core competencies?

Key Terms

Present strategy

Situation Analysis

Resource strength

Competence

Core competence

Distinctive competence

CHAPTER 5

STRATEGY AND COMPETITIVE ADVANTAGE

The essence of strategy lies in creating tomorrows competitive advantages faster than competitors mimic the ones you possess today. (Gary Hamel and C.K Prahald)

Strategies for taking the hill wont necessarily hold it. (Amar Bhide)

Chapter Outline

Generic Competitive Strategies Low cost leadership strategy

Broad differentiation strategies

Best cost provider strategies

Focused low-cost strategies

Focused differentiation strategies

Vertical integration strategies

Cooperative strategies (alliances)

Offensive and defensive strategies

First-mover advantages and disadvantages

Strategy and Competitive Advantage

Competitive Advantage exists when a firms strategy gives it an edge in Defending against competitive forces and

Securing customers

Key to Success

Convince customers firms product/service offers SUPERIOR VALUE Offer buyers a good product at lower price

- Use differentiation to provide a better product buyers think is worth a premium price

What is Competitive Strategy?

Consists of business approaches to Attract customers, fulfilling their expectations

Withstand competitive pressures

Strengthen market position

Includes offensive and defensive moves toCounter actions of key rivals

Shift resources to improve long-term market position

Respond to prevailing market conditions

Narrower in scope than business strategy

Objectives of Competitive Strategy

Build a COMPETITIVE ADVANTAGE

Cultivate clientele of LOYAL CUSTOMERS

Knock the socks off rivals, ethically and honorably

The Five Generic Competitive Strategies

Type of Advantage Sought

Low cost differentiation

Market Broad Range

Target of Buyers

Narrow

Buyer

Segment/Niche

A low-cost Leadership Strategy

Objective

Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to Under-price rivals and reap market share gains OR

- Earn higher profit margin selling at going price

Low-Cost Leadership

Keys to Success

Make achievement of low-cost relative to rivals the THEME of firms business strategy

Find ways to drive costs out of business year-after-year

Low-Cost Leadership means low OVERALL costs, not just low manufacturing or production costs!

Approaches to Securing a Cost Advantage

Approach 1

Do a better job than rivals of performing value chain activities efficiently and cost effectively

Approach 2

Revamp value chain to bypass some cost-producing activities

Approach 1: Controlling the Cost Drivers

Capture scale economies: avoid scale diseconomies

Capture learning and experience curve effects

Manage costs of key resource inputs

Consider linkages with other activities in value chain

Find sharing opportunities with other business units compare vertical integration vs. outsourcing

Assess first-mover advantages vs. disadvantages

Control percentage of capacity utilization

Make prudent strategic choices related to operations

Approach 2: Revamping the Value Chain

Simplify product design

Offer basic, no-frills products/service

Shift to a simpler, less capital-intensive or more streamlined technological process

Find ways to bypass use of high-cost raw materials

Use direct-to-end user sales/marketing approaches

Relocate facilities closer to suppliers or customers

Reengineering core business processes be creative in finding ways to eliminate value chain activities

Use PC technology to delete works steps, modify processes cut out cost-producing activities

Characteristics of a low-cost Provider

Cost conscious corporate culture

Employee participation in cost-control efforts

Ongoing efforts to benchmark costs

Intensive scrutiny of budget requests

Programs promoting continuous cost improvement

Successful low-cost producers champion frugality (not wasteful) but wisely and aggressively invest in cost-saving improvement

What Company Managers have to do to Achieve low-cost Leadership

Scrutinize each cost creating activity, identifying cost drivers

Use knowledge about cost drivers to manage costs of each activity down year after year

Find ways to reengineer how activities are performed and coordinated eliminate unnecessary work steps

Be creative in cutting some activities out of value chain system re-invent the industry value chain

The Competitive Strengths of low-cost Leadership

Better positioned than RIVAL COMPETITORS to complete offensively on basis of price

Low-cost provides some protection from bargaining leverage of powerful BUYERS

Low-cost provides some protection from bargaining leverage of powerful SUPPLIERS

Low-cost providers pricing power acts as a significant barrier for POTENTIAL ENTRANTS

Low cost puts a company in position to use low price as a defense against SUBSTITUTES

Low-Cost Strategy Works Best When:

Price competition is vigorous

Product is standardized or readily available from many suppliers

There are a few ways to achieve differentiation that have value

Most buyers use product in same ways

Buyers incur low switching costs

Buyers are large and have significant bargaining power

Pitfalls of low-cost Strategies

Being overly aggressive in cutting price (revenue erosion of lower price is not offset by gains in sales volume-profits go down, not up)

Low cost methods are easily limited by rivals

Becoming too fixated on reducing costs and ignoring

Buyer interest in additional features

Declining buyer sensitivity to price

Changes in how the product is used

Technological breakthroughs open up cost reductions for rivals

Differentiation Strategies

Objective

Incorporate differentiating features that cause buyers to prefer firms product or service over the brands of rivals

Keys to Success

Find ways to differentiate that CREATE VALUE for buyers and that are not easily matched or cheaply copied by rivals

Not spending more to achieve differentiation than the price premium that can be charged

The Appeal of Differentiation Strategies

A powerful competitive approach when uniqueness can be achieved in ways thatBuyers perceive as valuable

Rivals find hard to match or copy

Can be incorporated at a cost well below the price premium that buyers will pay

The Benefits of Successful Differentiation

A product/service with unique and appealing attributes allows a firm to

Command a premium price and/or

Increase unit sales and/or

Build brand loyalty

= Competitive Advantage

Types of Differentiation Themes

Unique taste Dr Pepper

Special features America Online

Superior service FedEx, Ritz-Carlton

Spare parts availability Caterpillar

More for your money McDonalds, Wal-Mart

Engineering design and performance Mercedes

Prestige Rolex

Quality manufacture Honda, Toyota

Technological leadership 3M Corporation, Int

Strategic Management Module

Documents

Transcript of Strategic Management Module