SM Lectures

8/3/2019 SM Lectures

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Course Title:Strategic Management

Instructor:

Saqib YousafPhD, Vienna University of Economics, Austria

Course Code:

MGT501


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IntroductionWhat is Strategic Management?

art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve itsobjectives

(Fred R. David, 2009)

Focus on integrating organizational functions to achieve its desireobjectives and success.

The purpose of SM is to create and exploit present and futurepotentials.

Strategic Plan is company's game plan. In world of scarce resourcesand competition strategic planning is essential to survive thecompetition and grow.


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History

Originated in 1950s, and got popularity in 60s and 70s.

In 1990s strategic management/planning was revived and stilldominate planning process in today's world of business

Strategic management is also referred as strategic planning.

Strategic planning is more used in business world.


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Stages of Strategic Management

Three main steps

1) Strategy Formulation

2) Strategy Implementation

3) Strategy Evaluation

Formulation Implementation Evaluation

Strategic Management


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1) Strategy Formulation

Defining vision, mission, objectives.

Identifying company's internal and externalenvironment.

Setting long term objectives.

Generating multiple and alternative strategies anddecide which strategy to pursue.

Deciding which business to enter and which to close.

How to allocate and assign resources.

Diversify or not, expand operation, appropriate to goglobal, mergers and ventures decisions.



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2 StrategyImplementation

Action Stage: Execution of chosen strategy.

Devise policies, allocate and assign resources, motivate people (needleadership and interpersonal skills).

Developing a supportive culture, creating organizational structure,

redirecting marketing efforts, preparing financial budgets,implementing information systems


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3) Strategy Evaluation Stage

To monitor and ensure that chosen strategy isworking fine.

Three Fundamental Activities

1) reviewing internal and external factors on thebasis of which strategy was developed (check your assumptions)

2) measuring performance

3) corrective actions

Need adjustment and shift in strategy asenvironmental forces constantly changing.

Key Message


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These three stages performed at corporate, divisional or strategicbusiness unit, and functional level.

Corporate StrategyBusiness Level StrategyFunctional Level Strategy

Strong interaction, communication, and team work.


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Strategic Management Model

Vision, MissionLong termobjectives

Selectstrategies

ImplementStrategy

(Management)

ImplementStrategy

(Operational)

EvaluatePerformance

Internal Audit

External Audit

Source: Strategic Management Concepts and CasesFred R. David, 2009. 12th Edition. p.46.


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Strategic Management Continuous and ongoing process (Economy, missed objectives,

competitors).

Not exact sequence elaborated in the Model (hierarchical levels)

Advantages of SM

Proactive approach (more informed decisions)

Better strategy through systematic and logical manner.

Empowered employees (understanding mission and objectivesmotivates employees). Participation ensure commitment to change.

Decentralized strategic planing (line managers own strategy)

Financial and Non-financial benefits (min. resistance to change,informed decisions, more aware ofOT. Teamwork, (Fred, R. David

p.48)

Key


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Why Firms Avoid Strategic Planning?

Poor Reward Structures Occupied with current crises Waste of time Too expensive

Laziness Content with success Fear of failure Overconfidence (rely on experience) Prior bad experience

Self interest Fear of unknown Difference of opinion (different perceptions) Mistrust on management

(Fred R. David, p.49)


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Dont'sin Strategic Management

Intention to gain control over decisions

Too hasty

Unable to communicate

Making decisions based on intuition Lack of support from top management

Take use of planners (not involving others)

Unable to Link plans to measure performance

Unable to manage resistance to change

Not much importance to planning (jump to implementation)

So much formal (discourage creativity)

(Fred R. David, p.49-50)


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Guidelines for Effective StrategicManagement

Open mindedness

Open Communication

Not follow idealistic approach rather focus on realities. (What you

can achieve in limited resources)

Don't follow multiple strategies.

Be objective and focused. (consider qualitative factors as it effects

strategy formulation like cultural, attitudes, and social responsibility

issues but in purposeful way)

Trade off (maximize profit or share holder's wealth (ethical issues).

(Fred R. David, p.50)


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Key Terms

Competitive Advantage

Strategist

Strategies


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Hypothetical Case

Telesys is operating in telecommunication and information industry.It provides technology solutions to business organizations. Theproduct of Telesys includes both hardware -system installation andsoftware development providing management decisions, HRIS, MIS,and financial solutions. Despite surge in telecom industry in Pakistan

the company has been stagnant in terms of financial and operationalgrowth. The CEO decides to hire the consultant to make strategy sothat the firm could also reap benefits from growing industry. Aftermuch hard work the consultant delivers the ComprehensiveStrategic Plan to the CEO. It was implemented with the hope to get

value from it. But after one year the performance measures did notshow any positive change rather there was chaos and lack of focusand commitment in pursuing set business objectives.

Questions:Whatcould betheprobablecausesofthis

lackofsuccessinstrategy formulationandimplementation?


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PlannedStrategy

RealizedStrategy

Deliberate Strategy

UnrealizedStrategy

EmergentStrategy

Unpredicted change

Revisited Strategy

Source: Hill and Jones, 2007, p. 24

Strategic Model


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Vision is necessary to achieve long term objective

What do want to become?

Basic guideline for developing mission statement

Should be short: one sentence

Input from managers

Example:V

isionthe world leader in transportation products and related services(GM)

Dell's Vision is to create a company culture whereenvironment excellence is second nature

To become world's leading consumer company forautomotive product and services (Ford Motors)

Visionand Mission Statement

Key Message


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What is our business (who is being satisfied, what is beingsatisfied, how are customer needs are being satisfied?

Reasons of existence (what is business) synonymous tomission statement (Peter Drucker)

Foundation for establishing objectives and formulatingstrategies

Set priorities, strategies, plans, work assignment, managerialjob design, and management structure.

Should not be static: rethink, revise, and restate vision andmission statement on regular basis.

Motivating force: give direction to organization andemployees

Mission Statement


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Involve everyone

Develop several mission statements then distribute it toemployees

Develop consensus

It ensures understanding, commitment and dedicationtowards developed mission statement.

Some organization use discussion groups of mangers andsome hires consultant or expert.

The ProcessofDevelopinga MissionStatement


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Research indicate that firms with formal and welldocumented mission statement have twice the average returnon shareholder's equity than those lacking it.

Positive relationship between mission statement and

organizational performance (Bart & Baetz).

However, some research did not found any link betweenfinancial performance and mission statement.

Importanceof Mission Statement


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King and Cleland states following reasons

Consensus on purpose of business

Basis for allocating resources

Translation of objectives into work structure (assignment oftasks)

To specify purpose and then break down into objectives in

such a way that cost, time, an performance parameters can be

controlled.

(Fred, R. David, eleventh edition, p. 62)

Reasons forDeveloping Mission Statement


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Broad (but fine balance between specificity and generality) allow

creativity

Provides sense of direction and help to select strategy/Basis forgenerating and screening strategic options

Inspirational force

Emphasize on potential growth opportunities/ mention utility offirm's product or service

Define organizations' purpose, customer orientation, product orservice, market, philosophy and basic technology

Illustration of social responsibility

Recommended length is less than 250 words

Characteristicsof Mission Statement


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1 Customers2 Products or Services

3 Markets

4 Technology

5 Concerns for survival, growth and profitability

6 Philosophy (basic beliefs, values, and ethical priorities

ex: people above profit, integrity)

7 Self concept

8 Concerns for society

9 Employees concerns

Componentsof Mission Statement


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Precise and measurable

Address crucial issues

Challenging but realistic Specify a time frame

Objectives/Goals

SMART


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We aspire to make PepsiCo the world's premier consumerproducts company, focused on convenient foods and beverages

We seek to produce healthy financial rewards for investors as weprovide opportunities for growth and enrichment to ouremployees, our business partners and the communities in whichwe operate. And in everything we do, we strive to act with

honest, openness, fairness, and integrity.

Exampleof Mission Statement

9

2

5

8

6

3


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Dell's mission is to be most successful computer company in the world atthe delivering the best customer experience in market we serve. In doingso, Dell will meet customer expectations of highest quality, leadingtechnology: competitive pricing; individual and company accountability;best in service and support; flexibility customization capability; superiorcorporate

citizenship; financial stability.

Exampleof Mission Statement


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Develop a Mission Statement of

selected business

Considering the nine criteria of

mission

statement

Class Activity


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The purpose of external audit is to make list of possiblenumber of opportunities and threats.

Key factors that influence business

Five Categories1 Economic2 Demographic, Social, Cultural, Environmental3 Political, governmental, and legal

4 technological5 competitive

Chapter3:The External Assessment


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Relationship Between Key External Factors

Economic

Social

Technological

Political

Competitive

CompetitorsSuppliersDistributorsRetailersCreditorsCustomersCommunitiesStockholdersUnionsGovernment

Trade associationsPressure groupsProductsServicesMarketsEnvironment

Organization'sOpportunities

and threats


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Involve employees across departments

Closely monitor key external factors

News magazines, internet, industry news etc.

Customers, suppliers, competitors, and distributors Evaluation through meetings

Identify and rank factors from most important to leastimportant

The Processof Conducting External Audit


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External factors in industry are more critical and gainingcompetitive advantage

Porter's Five forces model

I/O perspective believe that firms performance andprofitability depend on industry in which it is operating

Economies of scale, barrier to entry, product differentiation,and level of competition in industry

TheIndustrial/Organization (I/O) View


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Stock price Monetary and fiscal policy Exchange rate Economic policy Trade policy

Inflation

Some key economic issues: Shift of economy towards service,availability of credit, purchasing power, budget deficit,devaluation of Pakistani Rupees, Unemployment, global

economic conditions, OPEC, import and export trend, wages,taxation.

Economic Forces


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These factors significantly influence the way people live,work, and consume

Population issues

Urbanization

Pollution

De-regulation and regulatory issues

Political instability

Bureaucratic structure/legal issues

Cultural issues (Protest)

Social, Cultural,DemographicandlegalForces


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Internet (e-commerce)

Breakthrough technological changes can create new markets,obsolete existing products, competitive cost positioning in

industry, competitive advantage shift

Transition from manual to automated production

Technological Forces


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SWOT analysis of competitors

Their objectives and strategies

Product position of own and competitors

Strategic alternatives influencing competitors

Change in market competitor positioning and fluctuation intheir profits

Supplier and distributor relationship in industry prevailing

Substitute products potential in industry

Key factors of success in industry

Competitive Forces


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Joint Ventures

Strategic Alliance

Porter's Five Forces Model

Competitive Forces

Potential substituteProducts

Power of Consumers

Entry of newCompetitors

Rivalry amongCompetitors

Power of Suppliers

Source: Hill and Jones, 2007,

p. 117


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Rivalry Among Competitors

Most powerful force

Change in strategy may be responded with lower prices,quality enhancement, value added features, good sale andafter service, warranties, advertising etc.

Rivalry increase if industry structure is that fixed cost is

very high (leaving industry is difficult), more competitors,demand declining, consumer have choices for brands,extra capacity, price cutting so common.

Ultimately industry become unattractive and profit

decline

Porter's Five Forces


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NewEntrants

Factors that are barriers to entry such as economies of scale,specialized knowledge and technology, customer loyalty, brandpreferences, large capital requirements for starting business,

government policies, possession of patents, counterattack byexisting firms, saturation of market

CounterattackStrategiesagainstpotentialentrants When there is threat for entry is expected it can be counterattacked

by lowering prices, giving value added features, mergers andacquisition etc.



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Bargaining Powerof Suppliers When number of suppliers are large enough, raw material

substitute is rare or unavailable, switching to raw material is verycostly

Mutual understanding is crucial for long term profitability, developnew products, improve quality, and just in time delivery options

Backward integration strategy

Strategic partnership



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Bargaining Powerof Consumers Large, buy in bulk

When products are standardized (unbranded) and buy in volume

When consumers can move to other brand or availability ofoptions

Declining customer demand

They are aware of product cost and pricing



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List key external factors

Include limited possible numbers

Use percentage, ratio or number

Assign weight 0.0 not important and 1.0 very important based oncompetitive industry dynamics. The sum weight of all factors be 1.

Assign rating between 1to 4. Range 4 indicates=superior response

3= above average response, 2= average response, 1=poor responseThis is yours competitive strategy against these factors

Multiply weight to rating to get weighted score.

Industry Analysis:The External FactorEvaluation Matrix


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Industry Analysis:The External FactorEvaluation Matrix: AnIllustrationof Mobile

ComanyKey External Factors

Opportunities Weight Rating Weighted Score

Young population is increasing 0.12 3 0.36

Education awareness is increasing 0.03 2 0.06

Pakistani society is highly socialized 0.14 4 0.560.16 4 0.64

Excess to large population 0.08 3 0.24

Threats

Increasing competition on price cut basis 0.19 3 0.57

unemployment rate is increasing/economic 0.05 1 0.05

saving decreasing 0.06 2

0.12

high taxation 0.17 1 0.17

2.77

Government de-regulation policy


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It analyze major competitors and there strengths and weaknesses

Critical success factors may relate to internal or external matters

4 = main strength, 3= minor strength, 2= minor weakness, 1=

major weakness

It provides strategic information and strategic positioning

Competitive Analysis Profile Matrix


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Competitive Analysis Profile Matrix:AnIllustration

Company 1 Company2

Critical Success Factors Weight Rating Score Rating Score

Advertising 0.15 4 0.6 3 0.45

Product Quality 0.05 2 0.1 3 0.15

Prices 0.18 1 0.18 4 0.72

Top Management 0.05 2 0.1 1 0.05Financial Position 0.1 2 0.2 2 0.2

Brand Loyalty 0.22 3 0.66 4 0.88

Global Presence 0.04 1 0.04 2 0.08

Market Share 0.12 3 0.36 4 0.48

Services 0.1 3 0.3 3 0.3

2.9 3.31


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Major Themes HTC aim to position itself in highly emerging and competitive

industry to compete effectively with Apple and Blackberry at thehigh end and on other hand to compete with Nokia, Samsung andLG in other segment

The case introduce to devise platform strategy. How manyoperating system it should use/buy or develop its own

Where to position in value chain to add extra value added features

when competition goes beyond product and features. (to offer anapp store or not ?) (one hit product like iphone or variations)(platform to use one or several or develop its own)

HTC:The Case Study


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Question No. 1: Evaluate the HTC performance? What are itscompetitive advantages and weaknesses/competitivethreats/disadvantages?

Competitive advantages: An attractive alternative of iphone help HTC to increase sale and

profit margin

HTC's strong relationship with mobile phone operators (BT, T-Mobile, Orange, Verizon wireless). Many operators consideredHTC as established brand

Fast product development capabilities. Leads in developingproprietary user interface (UI) runs on both Android and Windows

Presence in Asia and Europe. Partnership with Google andMicrosoft

HTC:The Case Study


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Disadvantages HTC first to make smart phone but still unknown hard choice to

make phones for others

Lack of app store. Apple pioneer Samsung and LG has announcedto open

Limitations of partnership with Google and Microsoft. Cannotdictate to add features as Android has to take other handsetmanufactures interest in mind. Microsoft lacking cutting edgetechnology compare to Apple, RIM and Palm

High manufacturing cost. Cost of customization, licensing fee toMicrosoft

HTC:The Case Study


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Question No. 2: What should HTC's Operating System strategy be? Exhibit 5a Symbian losing market share RIM and Apple is gaining. Windows

platform slow to upgrade and make user friendly and chargeslicensing fee. Android free open source has great potential to capture market

share Three main strategies1) HTC has core competence in product development of Windows

and Android and should continue to stick to it. Rather it focus onproduct development based on Android at it is emerging(horizontal structure)

HTC:The Case Study


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2) Develop or buy as OS (Vertical Model): By developing or buy itswon will allow greater product development and design control.

Hardware and software development may gain competitive edgeand market shareExample ofApple and RIM

But downside of this Vertical Model isa) High cost (2-3 years and 200 million $)

b) High switching costc) Already very late: Saturation in the market Given these limitations: buying another company with its OS as

Palm will pay off

3) Add another platform like Linux (but may divert resources andR& D efforts invested in technological developing dedicated toAndroid and Windows Mobile

Depending on Android on long run may be risky as currentlyGoogle giving it free to encourage development but in next phasethey may control the platform.

HTC:The Case Study


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Question No. 3: What strategic actions are needed to make HTC leadingsmart-phone company?

Adopt the Vertical Model like Apple (few specialized products) butlimit economies of scale

Full line of Products (like Nokia, Samsung and LG cover mediumto high end price segments) attain economies of scale

Consider to merge with company having its own platform

Divert resources to marketing campaign to make it global brand

HTC:The Case Study


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Conclusion: HTC making innovative products and amongst the top five smart-

phone companies however to succeed further it should

Build strong brand positioning Where to position in value chain Solve platform problem Enter into new and emerging markets

HTC:The Case Study


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Every organization has its strengths and weakness

Information about organizations operations like marketing,finance, HR, design, R & D and production department etc.

It is great source of communication assist to understand how jobsfit in overall framework of organization and effect others job

How business functions effect or being effected by anotherfunctions (for example: poor financial performance may be theresult of ineffective marketing)

Chapter 4:TheInternal Assessment


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Internal resources like physical, human resource, financial,organizational resources (structure, planning, strategy, informationsystem, patents, etc)are source of competitive edge

For a resource to be valuable it should be rare, not easy to imitate,and not easily sustainable (no easy substitute)

Integration Strategywith Culture Organizational Culture is defined as a pattern of behavior that has been

developed by an organizations as it learns to cope with its problem of externaladaptation and internal integration, and that has worked well enough to be

considered valid and to be taught to new members as the correct way to perceive,think, and feel'(David, 2009, p. 139)

Resource BasedView


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Culture includes, beliefs, rituals, ceremonies, myths, stories,legends, symbols, heroes, heroines, saga)

Match strategy to culture or considered culture while formulatingstrategy

Domestic vs Foreign Cultures

MARKETING Seven functions are 1) customer analysis 2) selling product/services

3) product and service planning 4) pricing 5) Distribution 6)

marketing analysis 7) opportunity analysis

Culture


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Three important financial decisions investment, financing, anddividend Financial ratios are way to determine strength and weakness of

organizations in terms of these areas

Some important financial ratios are liquidity ratios (ability to

measure short term financial obligations), leverage ratios (howmuch financed by debt), activity ratios( how effectively firms usingresources), profitability ratios (over effectiveness returns generatedover sales and investment), growth ratios (show ability to maintaineconomic position in the industry, market, and economic growth)

Finance/Accounting


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All functions that transform inputs into goods/products/services

Process (design of physical production system) Capacity (optimal output levels) Inventory (managing raw materials)

Workforce (decision on managing employees clerical, technical,managerial, skilled)

Quality (to maintain and product high quality products andservices)

Production/Operations


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Strategy Implicationon Production/OperationsLow Cost High barrier to entry

Larger marketNeed longer production work andstandardisation

High quality More profit with low sales volumeHigh operating costBetter equipment and qualityprocedureSkilled and high wage worker

Stress CustomerService

More service peopleQuick response to customer needsand complaints

Innovation More R & D efforts and costs


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Strategy Implicationon Production/OperationsVerticalIntegration

More control on processMore risk as enter into new areaHigh cost on labor and operations

Consolidated

Processing(Centralize)

Economies of scale

One event can disrupt wholeoperation/productionLocate near major supplier orcustomer

Disperse

processing

Near to more customers or suppliers

Complex coordination and duplicationof resources

Use ofmechanization

High capital investmentReduces flexibility

Maintenance more critical


(David, 2009, p. 160)

h d D l


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If firm following product development strategy then need to focuson R & D efforts

R & D efforts must be coordinated and focused

The strategic management process assist and facilitate this crossfunctional decision to manager R & D

Four approaches to decide R & D investment1) how many new products are needed2) fund many project possible3) percentage sale method4) same amount as main competitors are spending

Two forms 1) Internal R & D 2) external R & D ( mergers,strategic alliance, sub contracting-sublet, joint venture R & D efforts mainly depend on organization strategy for example

market leaders in new product innovation or followers to work onexisting ideas and products.

ResearchandDevelopment


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According to Porter Business of firm can be described by value

chain analysis

All activities undertake to produce good and services foracquisition of raw material to processing/production to delivery toend users

Firms in a industry almost alike value chain

Value chain analysis assist to calculate and identify the costadvantages and disadvantages associated with the productdevelopment and marketing

Value Chain Analysis

total revenuetotal cost of allactivities

Value

try to calculate in terms ofboth time and money


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Value Chain Analysis: An ExampleofManufacturing Firm

Supplier cost Raw MaterialFuelEnergyTransportationTruck drivers

TruckMaintenanceComponent partsInspectionStoring

WarehouseProduction Cost Inventory System

ReceivingPlant layoutMaintenance

ComputerR & D

David, 2009, p. 165)


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Long term objective and its value Types of business strategies

Circumstances to follow particular strategy

Balanced Score Card

Financial and Strategic objectives

Level of strategies

First Mover advantage

Outsourcing

Strategies for dynamic market

Chapter 5:Objectives/TopicofDiscussion


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Long term results

Actions/strategies to be taken to accomplish long term objectives

Objectives and strategies to be persistent for three to five years

Objectives should be SMART

Narrated in growth in assets, sales, profitability, market share,earning per share etc

Long term objectives are set at corporate, divisional, and functionallevel

We can measure managerial performance and functions in terms ofobjectives achievement

Managerial reward should be associated with long term objectives

LongTermObjectives


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Managerial Performance byLevelofOrganization

LongTermObjectives

Organization Level Basis for bonus

Corporate 75% on long term objectives25% on short termobjectives

Division 50% based on long termobjectives50% based on short termobjectives

Function 25% based on long termobjectives75% on short termobjectives

(David, 2009, p. 176)


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Financialobjectives: in terms of growth and revenues, dividends,earning per share, profit margins, ROI, Stock price, cash flows etc

StrategicObjectives:large market share, fast delivery, fastestdesign time than competitors, low cost, product quality than

competitors, expansion of operations, ISO certification, technologyleadership, New Product development more often than

competitors.

Short term financial objectives can hamper long term strategyExample: To increase revenue charging higher price may damage the

efforts to increase market share

Trade off: Dont let long term strategic objectives to miss at theexpense of short term financial gains or objectives

Financial vs StrategicObjectives


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Developed by Robert Kaplan and David Norton in 1993

Tool to evaluate strategies and control

The name originate with the efforts to balance financial

measures/objectives with non financial measures/objectives

Balance Score Card


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11 types of different strategies and actions organization can pursue

Typesof Strategies

Strategy Def inition

Forward Integration Increased control ondistribution and retail

Backward Integration Control over supplier

Horizontal Integration Increased control over competitors (Mergers,acquisition)

Market Penetration Marketing efforts toincrease market sharethrough product andservices in markets

Market Development Introducing product andservice in new

geographical area: Market

Integrative

Intensive

Diversification


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Typesof Strategies

Strategy Def inition

Retrenchment Cost and asset reductionto reduce sales and profit

Divestiture Selling division or unit of organization

Liquidation Selling all assets of company

(David, 2009, p. 179)

Defensive


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Levelof Strategies

Corporate LevelCEO

Division: Division Head orVice President

Functional Level:functional head

Operational Level: plantmanager, sales manager

In small companies

this level is missing


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Typesof StrategiesandGuidelines

Strategies Guidelines

ForwardIntegration

Present distributors areexpensive, unreliable, in efficient

Availability of distributor is limitedHas finances and humanresource to handle distributorsRetailer or distributors have highprofit margin

BackwardIntegration Suppliers are expensiveNumber of suppliers are limited

Stable prices are importantSuppliers have high profit margins

HorizontalIntegration

Monopolistic opportunityCompete in growing industryEconomies of scale offer


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Marketdevelopment

When new retailers ordistributor are available easilyUntapped or unsaturatedmarket availableExcess product capacity is

availableIndustry is becoming global

ProductDevelopment

Present products are atmaturity stage to retaincustomers introduce new

improved productsIndustry of rapid technologicaldevelopmentCompetitors are offering qualityproductHigh growth industryOr anization has skills in R &


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Retrenchment When organization isweaker competitorLow profit, inefficiency, lowemployee morale, pressurefrom shareholderFirm is not able to capitalizeon external opportunitiesand avoid weaknessWhen organization hasgrown into massivestructure or volume

Divestiture When retrenchment strategyfailed to give resultsDivision need moreresources and organizationlack it

Division is performing very


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Porter's FiveGeneric Strategies

Type 1Type 2

Type 3 ---

-- Type 3 Type 4Type 5

Large

Small

CostLeadership

Differentiation Focus

FiveGeneric StrategiesType 1: CostLeadership-LowCostType 2: CostLeadership-BestValue

Type3

:DifferentiationType 4: Focus-LowCostType 5: Focus-BestValue

S

izeofmarket

(David, 2009, p. 193)


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Five Generic Strategies

CostLeadership (Type 1 andType 2) Economies of scale, learning and experience curve, capacityutilization, linkages with supplier and distributors,sharing ofknowledge and R & D, manufacturing plant, shipping cost, shiftingof plant, labor cost etc. Perform value chain activities more efficiently, Revisit entire

valuechain and eliminate some costly activities.

Conditions in which strategy works:when price competition is

veryintense, when similar products are easily available, few ways toachieve differentiation, when user product in same way, buyers havelow switching cost to other supplier, when new comers offer lowprice to attract and build customer base.


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Differentiation Strategy (Type3):greater product flexibility,compatibility, durability, reliability, better customer services, n orefeatures, ease of use, product performance etc.

Downside: if customer does not perceive differentiation worth than costleadership strategy will work well (justify higher prices)

Conditionsinwhichitworks:many ways to differentiate products,when customer need and uses varies, when few firms are following thisstrategy, when technological changes are rapid and competition revolvesaround features of product and services.

Focus Strategy (Type 4 andType 5):industry segments sufficientenough in size, large competitors ignoring the segment, marketpenetration and market development, niche marketing,

Conditions:market niche is large and has growth potential, when marketleader have no attraction or ignore this segment, when industry has manydistinctive niche markets having varied customer needs, when few rivalscapitalize on niche segment.

Five Generic Strategies


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Operating in Highly Change Markets

Response tochange

LeadingChange

AnticipateChange

offensive

Defensive

Offer new product ascompetitors offersAdjust to regulatoryenvironmentRespond to change in anduser expectation and needs

Buyer needs researchFollow and anticipatetechnological developmentsAnalyze the potentials ofglobalization and newmarket

Pioneer in new technologyand productsInnovate products thatshape the competition inthe industrySet industry standards

Strategy

React and respondDefend companyposition

Plan for future changesImprove product line

Be the agent of changeChange the rules of gamForce rivals to follow

(David, 2009, p. 197)

Means of Achieving Strategies


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Means of Achieving Strategies Joint Ventures and StrategicAlliances

Make temporary partnership Two or more sponsor companies make new organization

Example: Cross manufacturing agreements, joint bidding,cross distribution agreement, cross licensing agreement

Mergers and Acquisition Mergers: When two or more companies unite to formenterprise Acquisition: When large firm acquire smaller one GE formed in 1892 as a result of merger of Edison GeneralElectric Company and Thomson-Houston Electric Company

Outsourcing Business Process Outsourcing (taking over functionaloperations by another firms) Advantage: cost effective, focus on core business,other companies have expertise in performing functions,allow to focus on internal value chain activities

First Mover Advantage Entering new market or offer new product ahead ofcompetitors, Firm need to be fast learner otherwise in difficultsituation, fast follower or last mover may have advantage intechnolo ical industr to offer better new roducts next


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Chapter 6: Strategy Analysis and Choice

A Comprehensive Strategy Formulation Framework

Stage 1: The Input Stage

Competitive ProfileMatrix (CPM)

External FactorEvaluation (EFE)

Internal FactorEvaluation Matrix (IFE)

Stage 2: Matching Stage

SWOT SPACE BCG IE MatrixGrand Strategy

Matrix

Stage 3: Decision Stage

Quantitative Strategic Planning Matrix (QSPM)id, 2009, p. 222)


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The Matching Stage

Strategy matching refers to matching internal capabilities and corecompetencies with external opportunities

Using internal strength to capitalize on external opportunities can betermed as offensive strategy while overcoming weaknesses and avoid

threats considered to be defensive strategy designed

These two strategy designs are important to survive competition

Strength, weaknesses, opportunities, and threats analysis used to generatealternative strategies


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The Strategy Matching Tools SWOT analysis gear to develop four kind of strategies

SO strategies (GE) WO strategies (Fuel injection demand) ST strategies WT strategies (retrenchment, declare bankruptcy, or go for liquidation Method for developing alternative strategies using SWOT analysis

1) List firm internal strengths2) Internal weaknesses3) Opportunities4) Threats5) Match internal strength with opportunities and record SO strategies

6) Match and Record WO strategies7) Match and Record ST strategies8) Match and Record WT strategies

Example: if resources are available and suppliers are not efficient orreliable go for backward integration similarly if product capacity and

skills available and market is declining go for related diversification

Be quantitativeand specific


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Strategy Matching Tools

The Strategic Position and Action Evaluation (SPACE) Matrix

Conservative

Market PenetrationMarket DevelopmentProduct DevelopmentRelated Diversification

Market PenetrationMarket DevelopmentProduct DevelopmentRelated Diversification

AggressiveBackward, Forward, horizontal integrationMarket PenetrationMarket DevelopmentProduct DevelopmentDiversification (related and unrelated)

AggressiveBackward, Forward, horizontal integrationMarket PenetrationMarket DevelopmentProduct Development

DefensiveRetrenchmentDivestitureLiquidation

CompetitiveBackward, Forward, horizontal integrationMarket PenetrationMarket DevelopmentProduct Development

(David, 2009, p. 226)

Two Internal DimensionFinancial Strength (FS)Competitive Advantage (CA)

Two External DimensionEnvironment Stability

Industry Strength

For example see: page 230


82/100

Boston Consulting Group Matrix Business Portfolio (Profit Centers or independent business units) Strategy Formulation for Multi-divisional Firms


Relative Market Share Position

IndustryS

alesGrowth

Rate

Stars Question Marks

Cash Cows Dogs

Integration

Market PenetrationMarket DevelopmentProduct Development

Integration

Market PenetrationMarket DevelopmentProduct Development

Market PenetrationMarket DevelopmentProduct DevelopmentDivestiture

Product DevelopmentDiversificationRetrenchmentDivestiture

RetrenchmentDivestitureLiquidation

LowHigh

High

Lo

w

(David,

2009,

p.232)


83/100

Question Marks:Low market share position Cash need are very high and cash generation is usually low They are question mark in the sense that why these are not making

profit instead of high industry growth strategy flaw or need topursue intensive strategy or sell out etc. Stars:These are profitable business units earning profit from

growing industry doing well so they need investment or priority inbudget allocation in order to maintain their competitive position

Cash Cows:They are generating cash more than their needs.

Performing well in low industrial growth. At some time they mightbe in star mode.

Dogs:Weak external and internal position. Retrenchment is veryviable option it may revive.

BCG Matrix


84/100

With the passage of time (anti clock wise) Dogs may become Question Marks Question Mark may become Stars

Stars become Cash Cows Cash cow become Dogs

Limitations: Static showing company position at given time It is some time hard to classify business divisions in one of these

categories it may lie in middle. Too simple view other dimensions like competitive edge also

important element is strategy formulation

BCG Matrix


85/100

The Internal External (IE) Matrix

Positions company various divisions on nine cell matrix

IFE total weighted score

Strong Average Weak


EFEt

otalweigthedscroe

high

medium

low

I II III

IV V VI

VII VIII IX

Harvest or divest

RetrenchmentDivestiture

Grow and buildIntegrationMarket Devep. Penet., Product Devep.

Hold and maintainMarket Penetration Product Develo ment

(David,

2009,

p.234)


86/100

The Grand Strategy Matrix

Two dimensions Competitive position Industrial (Market) growth Industry with growth rate exceeding 5 % can be considered as

rapid growth industry

slow market growth

rapid market growth

weakcompe

titiveposition

strongcomp

etitivepositionQuadrant II Quadrant I

Quadrant III Quadrant IVRetrenchment(un)Related diversificationDivestitureLiquidation

Market developmentMarket penetrationProduct developmentHorizontal integrationDivestiture, liquidation

Market developmentMarket penetrationProduct developmentFwd. back.horiz integrationRelated diversification

Related diversificationun-related diversificationJoint ventures

(David,

2009,

p.237)

G S


87/100

Grand Strategy Matrix Quadrant I: companies in this quadrant are excellent performers.

They should focus on their competitive edge.

Quadrant II: They are in question mark as in BCG matrix. They areoperating in rapid growth industry but unable to take benefit.

Quadrant III: They are in problem so they should look forrestructuring or cost reduction efforts, increase efficiency

Quadrant IV: They should consider to diversify in more promisingor growth areas.

To decide and choose the best strategy from alternative strategies.We can prioritize and then select or can use Quantitative StrategicPlanning Matrix to select the appropriate strategy.


88/100

Quantitative Strategic Planing Matrix

Take information from stage 1 that is analysis stage (EFE, IFE,

Competitive Profile Matrix) Stage 2 that is matching strategy (SWOT, SPACE, BCG, IE

Matrix, and Grand Strategy Matrix) QSPM (Stage 3)

QSPM evaluate alternative strategies objectively and of courseintuition and judgment is also play its role.


89/100


Strategy 1Buy New Store

Strategy2

Renovateexisting

oneKeyFactors

Weight Attractiveness Score

TAS

Opportunities

Importance of the

factor

Relativeattractivenes

s of thestrategy forgiven factors(1-4)

Weight*AS

Threats

(David,

2009,

p.240)


90/100

Features: Number of strategies can be considered at once

Corporate level strategy, divisional level and operational orfunctional level strategy can be considered.

In QSPM internal and external factors are integrated to make

strategy choice

Limitations:It requires subjective judgment and estimates

Hypothetical Case: Zong is operating in highly competitivemobile industry in Pakistan. The competition is characterized by

price cut, network coverage and more value added features. Develop two alternative strategies that Zong must pursue and then

applyQSPM to choose best strategy.


Ch t 7 St t I l t ti


91/100

Chapter 7:Strategy Implementations This is more critical and difficult step than strategy formulation

It is operational issue

Strong motivation and leadership skills

Strong coordination among individuals and departments

ManagementIssues: Establishing annual objectives Devising policies Allocating resources

Rethinking and changing organizational structure Restructuring and Re engineering Matching culture to strategy Linking reward and incentives Managing resistance to change Modifying production and operations


92/100

Annual Objectives

Double revenue in three yearsthrough market development andpenetration

Division 1

Increase revenue by50 % this year

Division 1


Division 3


R &D

Develop two newProducts this year

Marketing

Increase sales force(50 new salespeople)

production

Increase productionefficiency by 50 %

HRReduce turnover andabsenteeism from 205 to 10%

FinanceObtain and arrange long termFinances of 4 million $

(David,

2009,

p.262)

Chapter 8: Strategy Implementation


93/100

Chapter 8: Strategy ImplementationOperational Issues

MarketingIssues: Owndistributionchannelorrelyononeorseveral

channels Modeofadvertising Fixedsalaryorcommensuratewithperformance,

commission

or bonuses Warrantiesissues Onlinepresenceornot Exploremorecustomersorrelyononemajorcustomer

Twocriticalissuesinstrategyimplementation 1) MarketSegmentationand 2) Product Positioning Market Segmentation:Importantimplication for businessstrategy forseveralreasonsI) Market Penetration,Developmentand ProductDevelopmentaimtoincreasesalethatisoftendependon findingorenteringintonewmarketse mentii allowssmall firmstocom eteiii affects

St t I l t ti


94/100

Strategy Implementation

FinancialIssues:Toarrangeshortandlongtermdebt,equity Leaseorinvestin fixedassets Determinethetime forreceivables Prepareproject financialstatements Evaluatingthe valueorworthof business(toimplement diversification, integrative, retrenchmentstrategies) Amountkeptasreservesetc.

Gopublicornot

St t I l t ti


95/100

Strategy Implementation

R & D issues: New product development, marketdevelopment etc.

MIS issues: timely and updated information for effectivedecisions.

Group Discussion: Strategy formulation is more important or strategy

implementation phase is more critical.

I/O view is more relevant or core competencies (innerperspective view) is pertinent for effective strategy

Ch t 9 St t E l ti


96/100

Chapter 9: Strategy Evaluation

Strategy Review, Evaluation and Control1) evaluate the underlying assumptions/basis of strategy2) comparing actual and targeted results3) take corrective actions

Too much or little (debate)

Strategy Evaluation in most firms focus on appraising ofperformance

Rumelt's Criteria for strategy Evaluation 1) Consistency: managerial problems persist. Even change of

people do not solve problem. Issue based. If one department get benefits or succeed and other fails If problems related to policy and issue regularly brought to

topmanagement

Strategy Evaluation


97/100

Strategy Evaluation

2) Consonance: Evaluate and observe trends. The purpose is tobe adaptive in course of change.

3) Feasibility:Strategy could be implemented with in givenfinancial, capital and human resources

4)Advantage: Competitive advantage

Key Message:Internal and external factors always changetherefore, today success is not guarantee of tomorrow. Therefore,strategy must be evaluated on regular basis.

Strategy Evaluation becoming more difficult1) increasing number of competition at global level2) Technological advancement, short product cycle3) World events unfolding at great pace4) Environment is now more uncertain and unpredictable

Strategy Evaluation


98/100

Strategy Evaluation

The Process: Management by wandering around essential anduseful technique to evaluate strategy.

Must be performed on regular basis (if performs once in a year,problem may aggravate to critical situation. No point of return.)

Employees must be involved. If major and basic targets missed then go back to strategy

formulation and implementation.

A Strategy Evaluation Framework: Reviewing basis of strategy: Review IFE and EFE matrix. Competitors move analysis and external factors evaluation Assessment of capabilities. Problems in implementation or wrong

strategy was chosen. Review of SWOT analysis Compare current IFE, EFE and SWOT with previous one

Strategy Evaluation


99/100

Strategy Evaluation

Revise IFE Revised EFE

Compare existing with revised

Is there significant

change?

Measure Organizational Performance

Is there significantchange?

Continue

Take correctivemeasures

yes

no

yes

no(David,

2009,

p.334)

Strategy Evaluation


100/100

Strategy Evaluation

Characteristicsof Effective Evaluation System Must be economical: not too much or too little information Should be clear, have objectives, meaningful and simple Time span must be matched with the event Must present true and accurate information and analysis: (Ex:

downwards sale may be the result of global recession) Evaluation system varies from small to large sized companies Employees must be taken into confidence and educate about

control.

Contingency Plans:very well formulated and implemented

strategy may not work due to unforeseen events or sudden shift inexternal factors. Develop contingency plans as alternative strategies

It helps to put back organization on track very quickly

Documents

SM Lectures