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Analyzing the BusinessEnvironment
(The Strategic Position**)Prof Ashish K Mitra
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Analyzing Environment
Awareness of the environment is not a specialproject to be undertaken only when warning ofchange becomes deafening
Kenneth R Andrews
Analysis is the critical starting point of strategicthinking
Kenichi Ohmae
It is not the strongest of the species that
survive, nor the most intelligent, but the onemost responsive to change
Charles Darwin
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Company Mission
External EnvironmentOperatingIndustryRemote
Company Profile(Resources & capa-bilities)
Strategic Analysis and Choice
Long-term Objectives Generic & Grand Strategies
Annual Plans &Short term Objectives
Functional / Operating
Strategies/ tactics
Policies that empower
action
Institutionalization of Strategy
Strategic Control & continuous improvement
? Pos
sible
? Desired
Competitor -> buyer and to consider
explicitly possibilities of substitution and newentrants. Value net draws complementary relationships
into the picture and accounts for thecomplication that complimentor can also
become a competitor Ghemawat says even more types of players
needed to be added, depending on the context
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Re-cap of analyzing business environment
Porters Five forces model of competitionfor Industry analysis
Strategic Groups within Industries
Industry life cycle analysis Embryonic stage
Growth stage
Shakeout stage Mature stage
Declining stage
Strategic Groups Within Industries
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Strategic Groups Within Industries
The concept of strategic groups
Within an industry, a competitorgrouping using similarstrategic characteristics, that differ from other groupswithin the same industry or sector.
There may be different characteristics whichdistinguish between strategic groups. E.g; Size,geographic coverage, breadth of product range, qualityor service level, R &D spending etc
Companies in same strategic group follow largelysimilar strategies or compete on similar bases in the
markets
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Impl icat ions of strategic gro ups
The closest industry competitors are those in thesame strategic group.
The various industry groups are differentially and
competitively advantaged and positioned.
Mobility barriersinhibit the movement of competitorsfrom one strategic group to another. Mobility barriersbetween different strategic groups vary from industry
to industry. Could be related to capabilities ,resources of the companies in different strategicgroups.
Strategic Groups in the Pharmaceutical
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Strategic Groups in the PharmaceuticalIndustry
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The concept of Organizational Fields is a way ofunderstanding this widernetworkofinfluences andre lat ionshipsin business environment.
Participants of organizational field interact morefrequently with one another than with those outside thefield. These relationships often constraint, guide or even
dictate economic decisions and priorities such asresource deployment.
Organizational field of justice has lawyers, police,courts, prisons, and probation services. Although theirroles are different they are all committed to deliver good
justice. In case of say telecom company other than valuechain partners, it will be regulators, professionalassociations etc.
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Various members of an organizational field
are tied together in the ways beyondeconomic dependency. They share acommon set of purposes ( at least at thegeneric level) and more crucially they arelikely to share a set of taken-for-grantedbeliefs and assumptions. This may bedeeply embedded and hard to surface and
concern the legitimacy of an organizationwithin an organizational field.
Th I d t Lif C l M d l
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The Industry Life Cycle Model
Stages in the industry lifecycle:
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The five forces, strategic groups, and l i fe cyclemodelsprovide useful ways of thinking about and
analyzing the nature of competition within an industry toidentify opportunities and threats. Howevereach has itslimitations & managers need to be aware of the same.
In many industries competition can be viewed as a
process driven by innovation. Innovation often causeschanges in the industry life cycle. (several shakeouts inTelecom industry).
Innovations frequently lower the fixed costs of
Production, thereby reducing barriers to entry. A fiveforces model applied to steel industry in US in 1970would look very different from that applied today.
Porter in his recent work saysinnovations unfreeze &
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yre-shape industry structure.
He argues that after a period of turbulence triggered byinnovation, the structure of an industry once more settles
down to a fairly stable pattern , and the five forces andstrategic group concepts can once more be applied. Because the five forces and strategic group models
present a static picture of competition, they can notadequately capture what occurs during period of rapid
changes in the industry environment when value ismigrating. Many industries are tending to become hypercompetitive,
meaning that they are characterized by permanent andongoing innovation. The structure of such industries areconstantly being revolutionized with few periods ofequilibrium.Competitive advantages are quickly eroded
A company wou ld not be prof i table just because i t isbased in an attract ive indus try or strategic group.
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FIGURE 3.4
Punctuated
Equilibrium
andCompetiti
ve
Structure
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Entrepreneurship & innovation are fundamentalfeatures of competition and driving force behindindustry evolution. Innovation represents aperennial gale of creative destruction through
which favorable industry structures monopolyin particular contain the seeds of their owndestruction.
Hyper competition
Competition in the new industry ( digitaltechnology)
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What are the key forces at work in the competitiveenvironment? These will differ by type of industry.
What are the underlying forces in the micro-environmentthat are driving competitive forces? Eg;lower cost & high availability of software skills in India isan opportunity & a threat to Us & Eurpean companies
Is it likely to change, if so, how? For eg; governmentaction in reducing health care costs & promotion of
generics would increase pressure on branded drugs inUS.
How do competitors standin relation to competitiveforces? Their weaknesses & strengths.
What can managers do to influence the competitiveforces affecting an SBU? Can they build entrybarriers,power over suppliers or diminish rivalry?
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Competitive advantage erodes over time due toforces discussed above and / or competitors willovercome adverse forces.
Theprocess of erosion of is getting speeded upby changes in macro-environment such as newtechnologies, globalization or deregulation.
Though time scale differs, Competitiveadvantages is mostly becoming temporary.
Organizations respond to erosion of theircompetitive position by creating cycles of
competition various moves & counter moveson the basis of cost / quality thus shifting thebasis of competition.
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Organizations are increasingly operating insituation where the speed of the cycles of
competition is very fast this has been calledhyper competition.
Hyper competition occurs where the frequency,boldness and aggressiveness of dynamic
movements by competitors accelerate to createa condition of constant disequilibrium andchange.
Whereas competition in slower-movingenvironments is primarily concerned with
building and sustaining competitive advantagesthat are difficult to imitate, hypercompetitiveenvironments advantages will be temporary.
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Competi t ion is about disrup t ing the
status quoso that no one is able tosustain long -term advantage on any
given basis.
So long term advantage is gained througha sequence of short lived moves.
M k S A k i f
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Market Segments : A market segment is a group ofcustomers who have similar needs that are different fromcustomer needs in other parts of the market.
Theoretically different factors could be used to identifymarket segments.. Demography age, sex, race,income, family size, life cycle stage, Lifestyle, Size ofpurchase, purpose of use, purchasing behaviour.
Industrial markets classification could be based onclassification of buyers like domestic industry vs foreignbuyers.
Identifying strategic customer: Strategic customer is the
person(s) who have the most influence over the goods orservices that are purchased. Hence strategy mustaddress them. In many markets the strategic customeracts as a gatekeeper to the end user.
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Manufacturers have two customers the shops and theshops customers. So there has to be an understanding
of what is valued by that strategic customer as a startingpoint of the strategy. However the requirement of theother customer has also to be met.
In many consumer goods, the retail outlet is the strategiccustomer as the way it displays, promotes & supportsproducts in store is hugely influential on the finalconsumer preferences.
But internet shopping may change this pattern, puttingthe final consumer back as the strategic customer.
Understanding what customer Values..
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Understanding customer needs and how they differbetween segments is crucial to developing appropriatestrategic capability in an organization.
However, value is mult i -d imensional & i t should beseen through the eyes of the cus tomers. Value ofproduct or services is often wrongly conceived ofinternally ( eg; designers, engineers, teachers orlawyers) and not tested out with customers or clients.
Threshold requirements( product features) are expectedfrom any provider in a given market segment
Critical Success Factors (CSFs) are those productfeatures that are particularly valued by a group of
customers and, therefore, where the organization mustexcel to outperform competition. Understanding of theCSFs of a group of customers ( market segment is veryimportant.
Strategic Gaps
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g p The framework of PESTEL ( macro environment factors),
Five Forces (Industry environment factors) and others
like strategic groups, custom er valuehelp managersidentify and / or create new market space to gaincompetitive advantages.
Kim & Mauborgne in Blue Ocean Strategy have arguedthat if organizations concentrate on competing head to
head, the environment will get very tough. They haveencouraged managers to seek opportunities in businessenvironment which they call strategic gaps.
A s trategic Gapis an opportunity in the competitiveenvironment that is not being fully exploited bycompetitors. There may be different opportunities to dothis:
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Looking across substitute industries : direct rivals tend totrigger a stronger response than potential substitutes.
Software companies bringing electronic books & atlasesas substitute to paper versions.
Looking across strategic groups: particularly if changesin micro environment make new market spaceseconomically viable.
Looking across chain of buyers: adjusting marketingstrategy to most profitable buyer or influencer.
Looking across complementary products & serviceoffering: like providing wholesome book buying
experience instead of just stocking the right books. Looking for new market segment: like no frills segment
Looking across / ahead in time
Strategies to Alter Industry Structure
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g y
Opportunity to change industry structure in
order to alleviate competitive pressure ?
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In North America & Europe Petroleum refiningearning below cost of capital
Reason - many competitors, excess capacity &commodity products
Consolidation to increase concentration, capacityrationalization; BP acquired Amoco, then Arco; Exxonmerged with Mobil; In Europe Total, Fina & Elf merged.
US Airlines - mergers & alliances to reduce competition.
In Chemical industry BASF, Dow, ICI & Bayer-
capacity swapping & rationalization Mittal & Arcelor merger consolidation of fragmented
global steel industry
The Rise of strategy consultants
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The Rise of strategy consultants BCG, founded in 1963, had a major impact by applying
quantitative research to problems of business and
corporate strategy. Its founder, Bruce Hendersonbelieved that goodstrategy must be based primarily onlogic, not.. On experience derived from intuition.
Economic theory will eventually lead to thedevelopment of a set of universal rules for strategy,
rather than strategy being largely intuitive and basedupon traditional patterns of behavior which have beensuccessful in past. ( business of selling - powerful oversimplifications)
BCG came out with the concept ofexperience curve
in 1965-66 to explain pr ice and com pet it ive behaviorin extremely fast grow ing segments of indus tr ies forits clients like Texas Instruments, Black and Decker.
Exper ience cu rve
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Exper ience cu rve
BCG , based on close study of fast growing industriespropounded that as the total accumulated experience of afirm in the industry increases, it incurs less cost ofproducing a product.
BCG claimed that for each cumulat ive doubl ing ofexperience ( accumulated production over time ) , totalcosts would decl ine rough ly by 20%-30% because of
economies of scale, organizational learning andtechnolog ical innovat ion.
According to BCGs explanation of its strategicimplications, the producer who has made the mostunits should have the lowest costs and the highest
profits. Bruce Henderson claimed that with experiencecurve, thestability of competitive relationships should bepredictable, the value of market share change should becalculable, the effects of growth rate should also becalculable
E i
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Eperience curve
Volume effect is not only the one to helpreduce cost & increase efficiency , thelearning from experience plays a vital role
in achieving this. Over time, companies can identifyinefficient, ineffective procedures. They re-engineer processes, improve material and
resource management, strengthensupplier relationships etc.
The Experience Curve
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The Experience Curve
Strategic Analysis
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g y Strategic Analysis is done at
Corporate level
Business level
In a multi-business corporation at Corporatelevelthe major strategic decisions are about
What Businesses should the we be in?
How should we allocate resources between them?
Other important decisions relate to How do we organize the corporation ? How much decision
making should we allow at the level of individual business unit?
What activities would benefit from being organized centrally?
How do we exploit the potential links between different but
related, business units?
How do we develop and reward business unit managers?
Two Levels of Strategy
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Two Levels of Strategy
A diversified company has two levels of strategy
2. Business-Level Strategy(Competitive Strategy)How to create competitive advantage in each
business in which the company competes
1. Corporate-Level Strategy(Company-wide Strategy)How to create value for the corporation as a whole
Key Questions in
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Key Questions inCorporate Strategy
1. What businesses should the corporation be in?
2. How should the corporate office manage thearray of business units?
Corporate Strategyiswhat makes the
corporate whole add upto more than the sum ofits business unit parts
Portfolio anal sis
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Portfolio analysis
Corporate level : tools like BCG Growth-Share Matrix,and GE Nine-Cell planning Grid are used to examineeach business as a separate entity and as a contributortothe organizations total business portfolio. The above analysis provides a neutral basis for
resource allocation at the corporate level, encourages framing of good strategies at the businessunit level and
leads to better implementation of strategy because ofintensified focus and objectives all across the
corporation. Business units are classified into invest , ho ld ,divestandharvestcategories based on theanalysis
BCG Growth- Share Matrix
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By early 1970s, the experience curve had led to BCGsGrowth-Marketshare matr ix concept, which
represented the first use of portfolio analysis. Thisapproach is widely used in Corporate strategic analysisfor managing a portfolio of different business units ( ormajor product lines). It helps in analyzing likelygenerators and optimum users of corporateresources.
The matrix takes into consideration, the growth rate ofthe market and relative market share of the business unit
In fast growing industries / market provide opportunity forhigh profits and rapid growth of turnover.
High market share gives benefits ofeconomies of scaleand better bargaining powerin relations to the suppliersand customers for the organization
BCG matrix displays position of each business in the twodimensional matrix
BCG Growth Share Matrix
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?
$
High Low
Market Share
M
arket
G
rowth
High
Low
STARS QUESTION MARKS
Cash Cows Dogs
BCG Growth Share Matrix
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BCG Growth- Share Matrix.
Business units after due considerations, get classifiedinto one of the four quadrants ( categories), viz; Cashcow, Stars, Question Marks, and Dogs.
Cash Cows
These business units hold large market share in amature & slow growingindustry
Have strong business position & negligible investmentrequirements. Hence returns from these businesses
far outstrips their investment requirements Cash cows are tapped for drawing out resources
required elsewhere in the organization.
BCG Growth Share Matrix
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BCG Growth- Share Matrix.
Stars These businesses have large market share in
growing industries
Since industry is growing, to maintain/ grow the
market share, firm needs to invest
Often investment requirements of Stars are greaterthan revenues
Once the industry reaches the stage of maturity, the
stars hardly needs any investment and become majorrevenue generators
BCG Growth Share Matrix
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BCG Growth- Share Matrix.
Question Marks These businesses have a small market share in a
high growth market.
They demand significant investment because their
cash needs are high, a norm in growing industries However, acquiring market share is easier in high
growth industry than in a mature market
However the chances of success has lot ofuncertainties
Only a few question marks are finally able to growinto stars
BCG Growth Share Matrix
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BCG Growth- Share Matrix.
Dogs These businesses have low market share in an intensely
competitive mature industry
Characterized by low profits
A dog does not need much capital investment, but it ties up
capital that could be invested in industries with better returns Firms concentrate on recovering as much as possible from these
and undertake ruthless cost cutting
Unless there is an over riding larger purpose, an organizationshould divest dogs
Well managed dogs( eg; those having strong control overcosts, focus on niches) can be reliable revenue generator.Yet the poss ib i l ity of being transform ed into a cash cow
does not exist.
BCG Growth Share Matrix
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BCG Growth- Share Matrix.
BCGs basic strategy recommendation was to maintain abalancebetween cashcows ( ie; mature businesses)and stars, while allocating some resources to feedquestionmarks ( that is, potential stars). Dogs are to besold off.
Since the producer with the largest stable market shareeventually has the lowest costs and greater profits, it isbecoming vital to have a dominant share in as manyproducts as possible.
Market share in slow growing market can be gained onlyby reducing the share of competitors, who are likely tofight back.
.
BCG Growth Share Matrix
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BCG Growth- Share Matrix.
If a market is growing rapidly, a company can gainshare by securingmost of the growth. Thus , whilecompetitors grow, the company can grow even fasterand emerge with a dominant share when growth
eventually slows
Shortcom ings o f BCG matr ix
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BCG Matrix is based on the basic logic that relativemarket share is l inked direct ly to cash generat ionand prof i tabi l i ty. The firm with the largest cumulativevolume gains the benefits of the experience of theexperience curve first, so market share is critical.
BCG Matrix has been criticized for over-s impl i f icat ion.Firstly it usesjust two performance measures. Secondly,direct & inevitable relation between market share and
profitabilityis questioned by some. Besides, relative market share & industry growth rates,
there are wide range of other variables. This matr ixtakes no accoun t of di f ferent iation or fo cusstrategies; it seems to relate best to cost based
strategies where price competi t ion is severe andexperience curve effects are signif icant.
Companies in focused niches can also have lowoperating costs.
There can be practical difficulties in decidingwhats exactly high and low ( growth and
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what s exactly high and low ( growth andShare) can mean in a particular situation.
In many organizations besides cash, theinnovative capacity is a critical resource, whichconsists of time & creative energy of theorganizations managers & designers. Stars &Question marks are very demanding on the
types of resources. Sometimes dogs are retained to complete
product range and a credible presence in themarket. They may also be held for defensive
reason to keep competitor out. Synergy of the SBU combination? Behavioral implication creation / management of
balanced portfolio?
Developments at GE
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Development s at GE
In1968, CEO of GE asked McKinsey to examineGEs corporate structure.
At that time GE consisted of 200 profit centersand 145 departments arranged around 10
groups. Boundaries of these units had beendefined around financial control aspects.
McKinsey study recommended a formal strategicplanning system, which will divide the company
into natural business units, later renamedstrategic business units ( or SBUs)
GE Nine-Cell Planning Grid(also called GE-
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g (Mckinsey nine-block matrix)
This is an adaptation of BCG approach. In 1971, GEasked Mckinsey to evaluate strategic plans for i tsSBUs. GE had already considered using BCG matrix todecide on the fate of its SBUs but its top managementhad decided that they could not set priorities on the basisof just two performance measures. After studying theproblem for 3 months, a Mckinsey team produced whatcam to be known as nine-cell matrix.
The nine-cell approach used approximately one dozenmeasures to screen for Industry attract iveness andanother set of measures to screen for Businessstrengthor competitive position, although the weightsattached to those measures were not specified.
This nine-cell grids thus makes an effort to overcomesome of the limitations of BCG matrix.
GE Nine-Cell Planning Grid
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GE Nine-Cell Planning Grid
For assessing industry attractiveness, itconsiders following factors Market size and growth rate, industry prof i t
marg ins, competitive intensity, seasonality & cyclicalqualities, Barriers to entry, Economies of scale,
technology, social, environmental, legal, political andhuman impacts.
For assessing business strength orcompetitiveposition, following factors were used Relative market share, prof i t margin, customer &
market knowledge ,ability to compete on price orquality, technological capability, image, competitivestrengths and weaknesses, caliber of management
Process for deploying Nine-Cell
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grid analysis
First identify factors contributing to theindustry attractiveness.
Next assign weights to each attractiveness
factorbased on its perceived importancerelative to other attractiveness factors.
Favorable to unfavorable future conditions areforecasted and rated based on a 0 to 1 scale
Obtain a weighted composite scoreforabusinesss over all industry attractiveness
Industry Attractiveness Factors
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Industry Attractiveness Factors
Industry attractiveness factor Weight Ratings Score
Market size 20 0.5 10.0
Projected market growth 35 1.0 35.0
Technological requirements 15 0.5 7.5
Concentration ( a few largecompetitors)
30 0 0
Political and regulatory factors Must benonrestrictive
Total 100 52.5
GE Nine-Cell Planning Grid
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GE Nine Cell Planning Grid A similar procedure is followed in assessing the
Business strength Once the comprehensive score has been
calculated, the scores are classified intocategories such as high, medium or low in termsof projected attractiveness of the industry andprojected strength of business.
Then business units are classified into threecategories: First : Invest / grow Second: Invest selectively and manage for
earnings Third : Harvest or divest for resources
B i l ifi d I t / i
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Businesses are classified as Invest / growgivensame preference as Stars in BCG matrix.
Harvest / divest category is managed like dogsin BCG matrix.
Businesses classified in the selectivity/earnings
category are treated either as cash cows or asquestion marks
Each Business of the firm is represented by a
Circle in the nine-cell grid. The Size ( area) of
the circle represents the SIZE of The Industr y&the shaded area indicate the market shareof
the firm in the industry.
Business Strength Factors
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Business Strength Factors
Business Strength factor Weight Ratings Score
Relative Market share 25 0.5 12.5
Profit Margin 25 0.8 20.0
Customer & Mkt knowledge 15 0.7 10.5
Technological capability 20 0.6 12.0
Image 15 0.75 11.25
Total 100 66.25
Industry ( product market) Attractiveness
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Invest /Grow Invest/Grow
Grow
selectively/mange earning
Invest/Grow
Grow
selectively/
mange earning
Harvest/divest
Grow
selectively/manage for
earning
Harvest /
divestHarvest /
divest
High Medium Low
Business
Strength
Weak
Average
Strong
GE / McKinsey Nine Cell Planning Grid
More sophist icated but more di f ficul t to
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interpret
As the axes in the GE-Mckinsey matrixbecome more complex & multi-dimensional, the advantage of clarity of
simple BCG matrix is somewhat lost Although it looks more sophisticated
model, it is not easy to plot businesses on
the matrix and to interpret what eachposition means.
Different perspectives
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Different perspectives
Strategic implications of Industryenvironments differ most strongly along anumber of key dimensions:
Industry concentration State of maturity of the Industry
Exposure to international competition
The Industry Life Cycle Model
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y y
Stages in the industry lifecycle:
Arthur D. Little Life Cycle Approach
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Arthur D. Little Life Cycle Approach
This approach to Portfolio Managementtakes into consideration the businessenvironment in terms of stage of life cycle
the business is currently in.
Arthur D. Little Life Cycle Approach
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Arthur D. Little Life Cycle Approach
Life cycle
stage
Position
Embryonic Growth Mature Aging
Dominant
Strong
Favorable
Tenable
Weak
The Life Cycle-Competitive
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Strength Matrix
Stage of Market Life Cycle
Introduction Growth Maturity Decline
High
Low
Descri ption of
Dimensions
Stage of Market Life
Cycle:
CompetitiveStrength: Overall
subjective rating,
based on a wide
range of factors
regarding the
likelihood of gaining
and maintaining a
competitive
advantage
Directional Policy Matrix developed by Shell (UK)
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Here the two axes of the matrix are
Business Sector Prospects Companys competitive abilities
A number of factors such as market growth,market quality, market supply and so on , are
used to rate the business sector prospects asunattractive , average, or attractive. Similarly,companys abilities are judged as weak,
average, or strong The 3x3 matrix forms the basis for classifybusinesses / major product group.
Different Roles of the Corporate Parent
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p
Portfolio Manager Restructurers
Synergy Managers
Parental developers
Strategic Analysisat Business level.. Business level Analysis : once business units are
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Business level Analysis : once business units areclassified into invest, hold, divest and harvest categories,SWOT analysis is employed to identify grand strategy
options at the business level A SWOT analysis summarises the key issues from the
business environment (using Pestel & Industry analysis)& and the strategic capabilities of an organization that aremost likely to impact on strategy development. ( strategiccapability is about the ability to provide products with features that are valued bycustomers, provide competitive advantage if it can do better than competitors)
Understanding What customers value or might value infutureis important . This includes customers thresholdrequirements. It also include critical success factorsthose factors that customers particularly value and,
therefore, where an organization must excel to outperformcompetition.What customer values will change with time. However,there may be opportunities to exploit core competencies innew markets or arenas
SWOT Analysis
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SWOT analysis is grounded in the basic principle thatstrategy-making efforts must aim at producing a good fit
between a companys resource, capability ( as reflectedby its balance of resource strengths and weakness) andits external situation .
SWOT analysis forces managers to better understandand respond to those environmental factors ( that may beeither inside or outside the organization) have thegreatest importance for the firms performance. Theseare strategic issues.
Strategic issues rarely arrive on a top managers desk
neatly labeled. Instead data from SWOT analysis identifynew technologies, market trends, new competitors, andemployee morale trends etc. They require interpretationand translation before they are labeled strategic.
SWOT Analysis Diagram
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y g
Numerous environmentalopportunities
Major environmental threats
Critical internal
weaknesses
Substantial
internal
strengths
Cell 3: Supports a
turnaround-oriented
/ eliminate weaknessstrategy
Cell 4:Supports a
defensive strategy
Cell 1: Supports
an aggressive
strategy
Cell 2: Supports a
diversification /
use current
strength to build
long term adv
strategy
STRATEGIC CAPABILITY** External environmentinfluences an organizations
St t i d l t b ti b th i i &
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Strategic development by creating both oppor tun i t ies &threats.
However, suc cess of strategyis heavily dependent onthe organization having or developing the strategiccapabi l i tyto perform at the level that is required forsuccess.
Strategic Capability is the adequacy and suitability ofthe resources and competences of an organisation for itto survive & prosper.
Many of the issues ofstrategy development areconcerned with changing strategic capabi l itybetter
to fit a changing environment 1990s adjustment to strategic capability through
adopt ion of new technolog ies in m fg indu str iestoincrease labor productivity; in 2000sadopt ion of IT byservice indu stry to s tay in the bus iness.
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In fast moving ( hypercompetitive) world
the only really enduring capability is theability to change strategyas the basis of
competition moves through different
phases of the cycle of competition. Indeedstretching IT capabilities andhypercompetitive behavior have been thebasis of dot.com companies.
The Roots of strategic Capability
Strategic Capability is about providing products
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Strategic Capability is about providing productsor services that are valuedby customers or
might be valuedin the future. The ability toperform at the level required for success. It isunderpinned by the resourcesandcompetenc iesof the organization.
What cus tomers valueis the starting point forunderstanding strategic capability
Firstare the threshold product features thatall potential providers must be able to offerto
stay in a particular market orsegment. Eventhese are changing and becoming moredemanding over time.
The secondare the Crit ical Success Facto rs,which are the features that are particularly
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which are the features that are particularlyvalued ( form the basis of selection ) by a group
of customers and, therefore, where theorganizat ion must excel to ou tperform thecompet i t ion.
Since different Customer groups value differentproduct features, organizations will need to
compete on different bases, and throughdifferent resources & competencies.
Supermarkets follow strategies which provide-lower prices and one-s top shoppingthrough
theirresources (store location, scale , productrange) and competencies ( knowledge ofmerchandising, skill of low cost sourcing &computerized supply chain systems)
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Corner shop grocery store gains Competitive
Advantage over supermarkets by concentratingon those custom ers whose CSFs are di f ferentaspects of serv ice-like,personalized service,extended opening hours, informal credit, home
deliveries etc. This strategy may be underpinned by unique
resources ( such as shop location, the marketknowledge of owner) and core competence ( thepersonal style and customer relationshipssustained by the owner)
Key Success Factors
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y
An industrys KSFs ( or CSFs) are those that most affectindustry members ability to prosper in the market place.
KSFs by their nature are impo rtant to al l f i rms in thatindustry or segment of the indu stry .
Determining the industrys KSF, given prevailing andanticipated industry and competitive conditions, is a top-priority analytical consideration
A sound strategy incorporates efforts to be competenton all indus try KSFsand to excel on at least one
factor KSF for an industry at any point of time should not be
more than 3-5 in numbers
Identifying KSFs
Pre-requisites for success
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Pre requisites for success
What do customers Want?
Analysis of demand
Who are our customers?What do they Want?What do they Value most?
How does the firmSurvive competition?
Analysis of competition
What drives competition?What are the main dimens ion
of competi t ion?
How intense is competition?How can we obtain superior
competitive position?
Key Success Factors
Identifying KSF for Supermarkets
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y g p
What do customer want? ( analysis ofdemand)
Low prices
Convenient location Product range adapted to local customer
preferences
Freshness of produce Cleanliness, service and ambience
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How does a firm survive competition(Analysis of competition)
Customer price sensitivity encourages
vigorous price competition Excise of bargaining power an important
influence on input cost
Scale economies in operation andadvertisement
Markets localized & concentration high
Identifying KSFs for supermarkets
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Key Success factors
Low cost operation requires : Operational efficiency
Scale-efficient stores
Large aggregate purchases to maximize buyingpower
Low wage costs
Differentiation requires
Large stores ( to allow wide range of products Convenient location
Easy parking
Common types of KSFs
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ypTechnologyrelated KSFs
Scientific research expertise ( important in Pharmaceuticals, Hi-techindustries, Telecommunication industry etc)
Technical capability to make production process innovation
Product innovation capability
Expertise in a given technology
Manufacturing-related KSFs Low cost production efficiency ( achieve scale of economies, capture
experience curve effects)
Quality of manufacture ( fewer defects, less need for repairs)
High utilization of fixed assets ( important in capital intensive
industries / high fixed cost industries) Low cost Plant locations
Ability to deliver products customized to buyer specifications (flexibility in manufacturing system)
Low cost product design and engineering capability( reducesmanufacturing cost)
Common types of KSFs Access to adequate supply of skilled employees
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High labor productivity
Distribution related KSFs
A strong distribution network of wholesalers/ dealers Gaining ample space on the retailers shelves
Low distribution cost
Accurate filling of customer orders
Short delivery times
Having company owned outlets Integrated distribution information system
Marketingrelated KSFs
Courteous customer service
Fast accurate technical assistance
Breadth of product line and product selection
Attractive styling or packaging
Clever advertising
Accurate filling of buyer orders ( few back orders or mistakes)
Merchandising skills
Common types of KSFs
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Skills-related KSFs
Superior workforce talent ( important in professional services like
Accounting and investment banking) Quality control know how
Design expertise ( important in fashion and apparel industry , oftenone of the keys to low cost manufacture)
Expertise in a particular technology
An ability to develop innovate products and product improvementsOrganizational Capability
Superior Information System ( vitally important in airline, car rental,credit card, Hotel & financial sector industries)
Ability to respond quickly to shifting market ( stream lined decision,
short lead time to bring new products) Managerial experience
Superior ability to deploy e-commerce technologies
Common types of KSFs
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Other types of KSFs
Favorable image or reputation with buyers Covenient locations ( important in many retailing
businesses)
Overall low cost operations( not just in manufacturing)
Access to financial capital Patent protection
Pleasant, courteous employees in all customer contactposition
KSFs vary from industry to industry and even from time totime within the same industry as driving forces and
competitive conditions change.
SF ExamplesK
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In the real estate development industry, acquiring landand maintaining liquidity are the two key success factors.If every other factor concerning the business of thedevelopment company is just average, but the land iswell located and the firm maintains adequate liquidity,the company will do well. Not that the developer
shouldn't attempt to deliver a well-constructed productwith good financing. He should. But nothing is a greaterdeterminant of success than having, or not having, theright piece of land, and remaining in a liquid position.
Knowing the importance of land acquisition to his company'ssuccess, the Chairman of one of leading real estate developerinstructed his managers, "Before you commit to the purchase of anypiece of land, I want to walk on it."
KSF Examples
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Beer/Brewing Industry Utilization of brewing capacity - to keep manufacturing
costs low
Developing a strong network of wholesale distributors -
to gain access to retail outlets Clever advertising - to induce beer drinkers to buy a
particular brand
Resources , competencies
Experience shows that resources and
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Experience shows that resources andcompetencies tend to be easy to imitate in the
medium term. Consequently, CompetitiveAdvantage needs to be secured by continuallyshifting the ground of competition.
So a core competence could be theprocess of
innovation which requires the ability to linktogether many separate areas of knowledgesuch as brand development, marketing andfinancial services.
Has an Organization the resources and competencies toid d t / i th t t th t
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provide products / services that meet the customerrequirements? Organization capability starts with
resources : Available resources to an organization, from both
within and those that can be accessed (network ofpartners, contacts) , to support its strategies
Threshold resources resources needed to stay in the
business, otherwise unable to serve particular markets.Threshold standards rise with time.
Unique resources to meet cr i t ical suc cess factorsof a part icu lar segmentand create compet i tiveadvantages. These are difficult to imitate.
Inadequate resources Resources that do notadequately underpin the meeting of threshold productfeatures. They may be adequate for other segments.
Redundant resourcesthese are no longer necessaryor valued
Competence is created when resources aredeployed into activities and into processes
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deployed into activities and into processesthrough which these activities are linkedtogether. Usually, the key to good or poorperformance is found here than in the resourcesper se.
Although an organization will need to reach athreshold level of competence in all activitiesthat it undertakes, only some of these activitiesare core competences.
Core competences are those competencesthat underpin the organizations ability tooutperform competitors by meeting the CSFsbetter than competitors.
Core Competencies might also provide basis on
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p g pwhich strategies might be builtto exploit
opportun i ties in o ther marketswhere the sameorsimi larcritical success factors are valued.
Core competencies might also be the basis forcreating opportunities in new arenas where the
same CSFs would be valued above those thatcurrently prevail. In other words, to change therules of the game in those new arenas.
What customers value will change with time, so
core competences willbe eroded. However,there may be opportunities to exploit corecompetencies in new markets or new arenas.
Same as competitors Better than competi tors
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orEasy to imitate
andDifficult to imitate
Resources
Competencies
Thresholdresources
Uniqueresources
ThresholdCompetencies
Core
Competencies
Difference in performance between organizations
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Difference in performance between organizationsin the same market is rarely explained by
differences in their resource base sinceresource can usually be imitated or traded.Superior performance will be determined by theway in which resources are deployedto create
competencesin the organizations activities. For example, knowledge of an individual will not
improve an organizations performance unless heis assigned ( or allowed) to work on particular
tasks which exploits that knowledge, or moreimportantly, is able to share that knowledge withothers who can build on it.
Performance is also affected by the process oflinking separate areas of knowledge & activities
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linking separate areas of knowledge & activitiestogetherboth inside and outside theorganization.
Although an organization will need to achieve athreshold level of competence in all of theactivities & processes that support the product &
service, only some will be core competence. Core competence are act iv i t ies o r p rocesses
that critically underpin an organizationscompet i tive advantage. They create & sustainthe ability to meet CSF of particular customergroup better than other providers that are difficultto imitate.
Core competencies must fulfill the followingcriteriaTh t t l t t ti it
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The competence must relate to an activity orprocess that fundamentally underpins the valuein the product or services featuresas seenthrough the eyes of the customer
The competence leads to levels of performancesignificantly better than competitors. (
Benchmarking may help in understandingperformance) The competence must be robust i.e; difficult to
imitate. Robustness will be greater where
competences are embedded to the extent thatmanagers themselves have difficulty in fullyexplaining what underpins success.
CSFs( product features that are particularly
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valued by customers) like good services ,
reliable delivery are easy to understand. Butcore competences are about the activities thatunderpin the ability to meet these critical
success factors, not the factors themselves.
Core competence may be embedded deep in anorganization at an operation level in the workroutines of the organization.
They are hidden to the extent that the managersthemselves may not explicitly understand them.
How Resources and Capabilities Provide
Competitive Advantage
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Competitive Advantage
The firm is organized appropriately to obtainthe full benefits of the resources in order torealize a competitive advantage
Valuable Allow the firm to exploit opportunities orneutralize threats in its external environment
Rare Possessed by few, if any, current andpotential competitors
Costly to imitate When other firms cannot obtain them ormust obtain them at a much higher cost
Nonsubstitutable
Resources and Capabilities, Core Competencies,and Outcomes
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and Outcomes
CoreCompetencies
Competitive
Advantage
Value Creation
Above AverageReturns
Valuable
Rare
Costly to Imitate
Nonsubstitutable
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Internal Analysis of the Firm
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Before a firm can start tapping the opportunities providedby the external environment, it has to know its owncapabilities, strengths and weaknesses. Internalappraisal has three distinct parts: Assessment of the strengths & weaknesses of the firm , in
different functional areas Appraisal of the status / health of the individual businesses of the
firm
Identification and assessment of the firms competitiveadvantage and core competence.
Internal analysis is also the starting point for developingthe core competencies (and competitive advantages)required for survival and growth of the firm
SWOT Analysis Diagram
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Numerous environmental
opportunities
Major environmental threats
Critical internal
weaknesses
Substantial
internal
strengths
Cell 3: Supports a
turnaround-oriented
/ eliminate weaknessstrategy
Cell 4:Supports a
defensive strategy
Cell 1: Supports
an aggressive
strategy
Cell 2: Supports a
diversification /
use current
strength to buildlong term adv
strategy
SWOT Analysis is a traditional approach that has beenin se for decades to help in internal analysis It offers
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in use for decades to help in internal analysis. It offersa general ized effo rtto examine internal capabilities inlight of external factors, most notably key opportunitiesand threats. Though still used by many, SWOT analys ishasl imi tat ionsl inked to the r igor and depth of
analysisand ther isk of over looking key
considerat ions.
A SWOT analysis can ov eremphasize internal strength s and
dow nplay external threats
A SWOT analysis can overemphasize a single strength o r
element of strategy
A strength is not n ecessari ly a source of com pet it ive
advantage
A SWOT analysis can be stat ic and can r isk ign or ing
changing ci rcumstances
Two techniques have emerged that can help
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Two techniqueshave emerged that can help
overcome some limitations of SWOT analysis by
offering more comprehensive approach to identify &assess firms internal resources & capabilities in amore sys temat ic , object ive & measurable manner.
Value Chain analysis
Resource-based View (RBV)is based on the premisethat firms build competitive advantage based on uniqueresources, skills, and capabilities they control or develop,which can become the basis for unique, sustainable
competitive advantages that allow them to craftsuccessful competitive strategies
Value Chain Analysis
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Primary
and
Support Activitie
s
in the
Value
Chain
SupportActivities{
Procurement
Technological Development
Human Resource Management
Firm Infrastructure
Primary Activities{Inbo
undLogistics
Operations
OutboundLogistic
s
MarketingandSales
Service
Value Chain Analysis A Business is seen as a chain of activities ( primary and
support activities) that transforms inputs into outputs
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support activities) that transforms inputs into outputs,that customers value.
Value chain analysis analyzes to understand how abusiness creates customer value by examining thecontributions of different activities within the business tothe total value. Proponents of VCA believe it allows
managers to better identify their firms competitiveadvantages by looking at the business as a process achain of activities.
Costs / resources incurred in each activity , identify
activities or elements within that which differentiate thecompany, as well as where company has weakness vis--vis the competitors. Spot areas of improvement.
What is the Resource-based Viewof the Firm?
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of the Firm?
Firms differ in fundamental ways
because each firm possesses a
unique bundle of resources tangible and intangible assets and
organizational capabilities to make
use of those assets
Resource Based View (RBV)
Three basic resources : Tangible Assets,
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Three basic resources : Tangible Assets,Intangible Assets, and OrganizationalCapabilities.
RBV method of analyzing and identifying a firmsstrategic advantages based on examining its distinctcombination of assets, skills & capabilities and
intangibles.
Organizational capabilities are not specificinputs like tangible or intangible assets, rather
they are the skills the ability and ways ofcombining assets, people, and processes thata company uses to transform inputs into outputs.
What makes a resource valuable?
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What makes a resource valuable?
1. Are critical to meet a customers need betterthanother alternatives
2. Are Scare few others, if any, possesses thatresource or skill to the degree your firm has
3. Drive a key portion of overall profits, in a mannercontrolled by your firm
4. Are relatively more durable or sustainable over time
Wal- Marts Resource Based Competitive Advantage
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Tangible
Intangible
Capabilities
Resources Industry Avg cost WalMart cost
( % of sale)
Store Locations
Brand reputationEmployee Loyalty
Inbound Logistic s
0.3 ( store rental space)
1.2 ( advertising expenses)1.1 (payroll expenses)0.7 ( Shrinkage expense)
1.2 ( distribution expenses)
Total Advantage = 4.5%
Internal Analysis: MakingMeaningful Comparisons
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Meaningful Comparisons
Perspectives
to use
1. Comparison with past
performance
2. Stages of
industry evolution
3. Benchmarking
comparison with competitors
4. Comparison withKey Success Factors
in industry
Benchmarking Benchmarking has revolutionized the culture of business
world over
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world over Benchmarking is based on premise that in all processes
including procurement, production, sales and services,one or other organization has achieved world classcompetitiveness.
Bmarking is a process for improving performance byconstantly, identifying understanding and adapting best
practices and processes followed inside and outside thecompany and implementing these adapted practices.
Emphasis is on exploiting best practices that lead tobest performance, and not merely measuring bestperformance.
It is a continuous process of learning, feedback,reflection and analysis of what works( or does not work)and why
What is Benchmarking?
What is Benchmarking?
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What is Benchmarking?
"Benchmark ingis a tool to help you improve yourbusiness processes. Anybusiness process can bebenchmarked."
"Benchmark ingis the process of identifying,understanding, and adapting outstanding practices
from organizations anywhere in the world to help yourorganization improve its performance."
"Benchmark ingis a highly respected practice in thebusiness world. It is an activity that looks outward tofind best practice and high performance and then
measures actual business operations against thosegoals."
A Company can compare its total organization or part of it withothers and adopt one or more of the following types ofbenchmarking
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Strategic Benchmarkingstudying strategies & long term
approaches that helped the best practice companies to succeed.Examine the core competencies, product development andinnovation strategies of such companies
Competitive or performance benchmarking compare theirposition with respect to the performance characteristics of keyproducts & services , involving companies from SAME SECTOR
Process benchmarking to improve specific key processes andoperations with the help of best practices organizations involved insimilar work or offering services
Functional ( generic) Bmarking- improve their process bycomparing with companies from DIFFERENT business sectors
involved in similar functions or work processes. ( eg Safetypractices)
Internal Benchmarking against own units, easy to get data
External bmarking help of high end performers/ successful Cos
International bmarking
Many business processes are common throughoutindustry For example; NASA has the same fundamental
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industry. For example; NASA has the same fundamental
Human Resources requirements for hiring anddeveloping employees as does American Express.British Telecom has the same Customer SatisfactionSurvey process as Brooklyn Union Gas. Theseprocesses, albeit from different industries, are all
common and can be benchmarked very effectively. It'scalled "getting out of the box".
By early 1990s, many Fortune 500 were implementingbenchmarking. Benchmarking also became a key
criterion for Malcolm Balridge Quality award. Xerox, ford,GE, AT&T, Motorola, citicorp early users
Capabilitiesrefer to a companys skills at coordinatingits resources and putting them to productive use. Theseskills reside in an organizations rules, procedures ,
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g , p ,styles or manner through which it makes decisions and
manage internal processes. More generally, Capabilities are result of a firms
organizational structure, processes, and control systems.Kind of behaviors that are rewarded, process of decisionmaking, cultural norms and values
Capabilities are intangible. They reside not so much inindividuals, as in the way individuals interact, cooperate,and make decisions within the context of anorganization.
A company may have firm specific and valuable
resources, but unless it has the capability to use thoseresources effectively, it may not create distinctivecompetency.
The Roots of CompetitiveAdvantage
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Innovation
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The act of creating new products orprocesses
Product innovation
Creates products that customers perceive
as more valuable, increasing thecompanys pricing options
Process innovation
Creates value by lowering production costs
Perhaps the most important buildingblock of competitive advantage
Responsiveness toCustomers
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Doing a better job than competitorsof identifying and satisfyingcustomers needs
Superior quality and innovation areintegral to superior responsiveness tocustomers
Customizing goods and services to the
unique demands of individualcustomers or customer groups
Responsiveness toCustomers (contd)
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Sources of enhanced customerresponsiveness
Customer response time, design,service, after-sales service and support
Differentiates a company/itsproducts; leads to brand loyalty and
premium pricing
The Generic Building Blocks ofCompetitive Advantage
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How Resources and Capabilities Provide
Competitive Advantage
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p g
The firm is organized appropriately to obtainthe full benefits of the resources in order torealize a competitive advantage
Valuable Allow the firm to exploit opportunities orneutralize threats in its external environment
Rare Possessed by few, if any, current andpotential competitors
Costly to imitate When other firms cannot obtain them ormust obtain them at a much higher cost
Nonsubstitutable
Resources and Capabilities, Core Competencies,and Outcomes
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CoreCompetencies
Competitive
Advantage
Value Creation
Above AverageReturns
Valuable
Rare
Costly to Imitate
Nonsubstitutable
Aspects to be covered in Strength-Weakness analysis
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The strengths and weaknesses of the firm have to be assessed in each
of the main functions / areas Marketing
Overall growthof the market Market standing / market share Innovation in marketing
Customer satisfaction level
Customer service level New product capability
Pricing / margins Channel position / distribution network Marketing communication on the whole advertising, sales promotion,
personal selling
Market Research Capability Marketing costs , Marketing organisation Productsmix and product lines
Product-wise position with respect to
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Profitability
Stage of product life cycle Product design / technological strength Differentiation Positioning Brand power
Finance Assets, liquidity, leverage, gearing, cash flow, cost of capital,
profitability, quality of financial management, tax planning
Manufacturing / Operations Capacity / scale of production, locational advantages, post
production facilities, Capacity utilization, cost of production, breakeven position, productivity, inventory management, flexibilty inmanufacturing, automation, availability of trained skills.
R&D
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Nature and depth of R&D capability
Resource allocated to R&D Quality, expertise and experience of R&D personnel Speed of R&D, capability of engineering products based on R&D Record of patents generated Comparison of R&D investment vs new product launched
Human Resources Morale & motivation of employees, personnel turnover, quality /expertise of personnel
Corporate / overall resources Company image , size, quality of top management, corporate
performance, innovation record, organization culture ,organizational structure, use of information technology, CEO,Board of directors, Overall adequacy of resources etc
Strategic Development Processes in
Organizat ions**
Strategic Planning Systems**: Often Strategy
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g g y gydevelopment is equated with Strategic planningsystem. This is manifestation ofDesignapproach to managing strategy. This takes formof highly systemized step by step, chronologicalprocedures involving many different parts of theorganization.
Formalized Planning provide a structured meansof analysis and thinking about complex strategicproblems, providing opportunity to managers toquestion and challenge the received wisdomthey take for granted.
It encourages a longer term viewof strategythan might otherwise occur. Planning horizons
I FMCG 3 5 b i t
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vary . In FMCG, 3-5 years may be appropriate.
In companies, which have to take very long-term views on capital investment, such as oilindustry, planning horizons can be as long as14 years ( in Exxon) or 20 years ( in Shell).
It can be a useful means ofco-ordination andhelp communicate intended strategy and createownership of the strategy by involving largenumber of people in development process.
Planning systems provide a sense of securityand feel of exercising control over the destiny ofthe organization.
Viewed through Experience lens, Planning mayhelp in drawing together experiences of people
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help in drawing together experiences of people
and ensure effective communication. Viewed from Ideas lens, Planning systemsprovide a selection mechanism by which newideas can be evaluated. New ideas andinnovations compete or prove their worth.
There are somepit falls also in the formalizationof strategic Planning process: Line managers, due to their pre-occupation with day
to day work, may actually cede responsibility forstrategic issues to specialist. This may result instrategic planning becoming an intellectual exerciseremoved from the reality of operations.
The process of Strategic planning may be socumbersome that individuals or groups in the firm might
t ib t t l t f it t d t d th h l
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contribute to only part of it not understand the whole.
Planners may overlook the cultural & political dimensionsof the organization , and also importance of experiencesof those in the organization.
Very formal system of planning, especially with tight
mechanism of control, can stifle ideas and havedampening effect on innovative capacity.
Planning can become obsessed with search for adefinitively right strategy.
Logical incrementalism**: In a study of majormultinational businesses, Quinn concluded that
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the strategic management process could be bestdescribed as logical incrementalism.
Managers have a view ofwhere they want theorganization to be in years to comeand t ry tomove towards this posi t ion incremental ly .
They do this by attempting to ensure thesuccess & development of a strong , secure butflexible core business while using the
experience gained to develop business andperhaps experiment with side bets. Encourageideas to emerge from lower levels as well.
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Strategic Leadership**
Strategic Development may also be strongly associatedwith an individual.
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A strategic Leaderis an individual upon whom strategydevelopment and change are seen to be dependent.Others in the organization willingly giving him theposition. In some organization the individual may beowner or founder, often in case of small businesses. In
some cases it could be an individual chief executive whohas turned around a business in difficult time.
The design lens suggests the individual carries out theanalysis & evaluation. These could be using his ownlogic or using techniques associated with strategic
planning & analysis.
The experience lens suggests that strategyadvanced by individual is formed on basis of the
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advanced by individual is formed on basis of the
individuals experience, perhaps within theorganization or perhaps from some otherorganization where he previously worked. Thestrategy advanced by a chief executive new to
an organization may be based on a successfulstrategy followed in previous organization.
The strategy of an organization may be more
symbolically with an individual, for examplefounder in a family controlled business.
Viewed from Ideas lens, Evolutionarytheorists emphasize the way in which the
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theorists emphasize the way in which the
strategies develop from competing ideas,so tend to diminish the role of so calledstrategic leader. However, a strategic
leader can provide the vision withsufficient clarity within which the discretionof others in the organization can be
exercised.
Organizational Politics**: The politicalview of strategy development is that
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view of strategy development is that
strategies develop as the outcome ofprocess of bargaining and negotiationamong powerful internal or externalinterest groups ( or stakeholders). This isthe world of boardroom battles portrayed infilms & TV dramas.
The design lens sees it as inevitable but
negative influence on strategydevelopment.
Experience lens helps to explain the likelihood of politicalactivity. People in organizations are rooted in theirexperience & therefore in approaching major problems,
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experience & therefore in approaching major problems,seek to be protective of their views preserving orenhancing the power of their positions.
Political activity may then seen as one explanation ofincremental, adaptive strategy development. Verysignificant change to strategy may be very threateningto the power of certain managers.
The experience lens also suggests that the analyticalprocesses that go into planning may not be entirelybased on objective and neutral facts.
Powerful individuals and groups may also stronglyinfluence the identification of key issues and indeed thestrategies eventually selected. Planning thus has apolitical dimension. Political activity has to be takenseriously as an influence on strategy development.
The ideas lens also suggests thatorganizational politics can be seen as
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organizational politics can be seen as
manifestation of the sort ofconflict thatresults from innovation and new ideas. Thevariety and diversity that exists in
organizations takes form in new ideassupported or opposed by differentchampions.
Imposed Strategy : Imposition of strategy byagencies or forces external to the organization.Government may dictate a particular direction eg:in public sector or when it chooses to privatise a
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in public sector or when it chooses to privatise a
PSU. MNCs are subjected to regulations in different
countries. An operating business within a multi-divisional organization might see overall
corporate strategic direction as an imposition onit. It might be argued that imposed strategy is a way
of overcoming the sort of strategic inertia that hadarisen as a result of strategies developing
incrementally based on history, experience orcompromises resulting from bargaining &negotiations of powerful groups.
Multiple Processes of Strategy Development**: First, there is no one right way. The way in which
strategies develop in a fast changingenvironment is notlikely to be same in an environment where little
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ychanges.
Second, it is very likely that the way the strategies aredeveloped will be seen differently by different people.
Senior executives tend to see strategies more in terms ofdesign, where as middle management tend to see themas a result of cultural political processes.
Managers who work for government organizations tendto see strategy as more imposed than those in theprivate sector.
There will be multiple processes at work. Even in apredominantly Planning system, some level of politicalactivity and certain elements of imposed strategy is likelyto be there.
Implications for Strategy Development
Intended and realized Strategies
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Strategic Drift Strategic Management in Uncertain and
complex conditions
Strategic Drift
Historical studies of organizations have shownprevalence of processes leading to emergent
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prevalence of processes leading to emergent
strategy. There are long periods of relative continuity
during which established strategy remainslargely unchanged or changes incrementally,there are also periods offluxin which strategieschange but in no very clear direction.
Transformationalchange, when there is afundamental change in strategic direction, doestake place but is infrequent.
The above pattern is known as punctuatedequilibrium.
There are strong forces at work which are likely to pushorganizations towards this pattern. Incremental strategicchange is a natural outcome of the influence ofexperience
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experience.
The influence of the paradigm and the way we do thingsaround here is likely to mean that faced with changes inenvironment, managers try to look for solutions with whichthey are familiarand therefore minimize the extent towhich they face ambiguity and uncertainty.
There is a danger that incremental strategic changes arenot enough to keep pace with environmental changes,and more fundamental or transformational change isneeded.
Indeed, often Transformational change tends to occur at
times when performance has declined significantly. Thereis a danger that Organizations under such pressure maybe acting reactively to the environment.
Some times strategic action required is outsidethe scope of current paradigm and existingculture, the core assumptions of managers.
Managers are more likely to attempt solutions by
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g y p y
searching for solutions within the existingparadigm & as last resort look for a new one asshown in exhibit 2.12
Strategic drift occurs when over a period, theorganizations strategy gradual ly moves awayfrom relevance, with respect to the forces in itsenvironment. Even most successful companiesmay drift in this way.
Indeed, there is a tendency which has become
known as the Icarus Paradoxfor businessesto become victims of the very success of theirpast.
See Exhibit 2.13 for phases of Strategic drift.
Organizations that seek to innovate could also
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sometimes face problems by developingproducts or services much ahead of itsenvironment ( market demand)
All these goes to emphasize the delicate
balance required while developing strategy.Internal cultural pressures tend to constrainstrategy development and at the same tome theorganizations need to cope with environmental
forces.
Strategic Management in Uncertain & complexcondi t ions
Different organizations face environments which differ inform & complexity. Since one of the main problems ofstrategic management is coping ith ncertaint the
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strategic management is coping with uncertainty, the
above aspect is very important. In simple / static conditions, the environment is easy to
understand & does not undergo significant change. Rawmaterial suppliers & some mass manufacturingcompanies are examples. Technical processes may be
fairly simple and competition & markets change very little.If environmental changes does occur, analysing pasthistorical patterns / forecasting helps predict them .
In situations ofrelatively low complexity, it may also bepossible to identify some predictors of environmental
influences. For example birth rates is a good indicator todetermine provision for schooling. So in simple / stat ic cond i t ionsstrategy development
in design termsmay make sense.
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Organizations in Complex situations face anenvironment difficult to comprehend. They mayface dynamic conditions too, and thereforecombination of complexity & uncertainty A
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combination of complexity & uncertainty. A
multinational firm or a government authority withmany services, may also be in a complexcondition because of diversity, while differentoperating companies within it face varyingdegrees of complexity & dynamism
Difficult to handle complexity by relying only onanalysis & planning. So organizational designis important. Decentralization with different partsof the organization made responsible for
different aspects & given the resources andauthority to handle their own parts.
Organizations have to learn to cope withcomplexity in different ways. Top
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management has to recognize thatspec ial is t down the l ine know more
abou t the env i ronment know more than
they do. This strategic competence basedon experience may provide competitiveadvantage . Taken-for-grantedhas to bechallenged
Simple Complex
ENVIRONMENTALCONDITIONS
Strategy developm ent in environmental contexts
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Static
Dynamic
Historical AnalysisForecasting
ScenarioPlanning
Decentralization ofOrganization
Experience &Learning
Formulation of long term strategies
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Grand Strategiesprovide basic directions oroptions available for a company for strategicactions. Grand Strategies are long termstrategies to achieve companyslong termobjectives ( also called master strategies or businessstrategies)
They can be broadly classified into 3 categories stability strategy / Consolidation
Growth strategies
Retrenchment strategies
Or a combination of the above
Ansoffs Product Market Matrix for Growth
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Present Product New Products
Present
Market
New
Markets
Market Penetration Product Development
Market development Diversification
Grand Strategies..
Concentration
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Concentration Market development Product development Horizontal Integration acquiring similar
businesses, same stage of Production Marketing chain Vertical Integration forward , backward Tapered Integration QuasiIntegration
Diversification Concentric diversification- synergy Conglomerate diversification
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JVs Strategic Alliances
Consortia
Turnaround Divestures
Liquidation
Quasi Integration Quasi integration refers tothe establishment of a relationship / alliance
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the establishment of a relationship / alliancebetween vertically related businesses (partners).some of the common forms of quasi integrationare: Minority equity investment
Loan or loan guarantees Pre-purchase credits Exclusive dealing arrangement Specialized logistic facilities
Co-operative R&D Benefits of Quasi Integration?
Turnaround Strategy
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A turnaround strategy is done
through
Cost reduction Asset reduction
Behavioral considerations affecting strategic
choice Strategic analysis rarely identifies one specific
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superior strategy. Different alternatives withdifferent or similar looking payoffs emerge.Under such circumstances, various factorsinfluence the choice. Some of the factors: Role of past strategies : inclination towards
continuity of past strategy.Thats why Firmssometimes replace key executives whenperformance of the firm is in adequate over extendedperiod. On the other hand, more successful thestrategy becomes, harder is to replace it even underchanged circumstances
Perception of KSFs & Distinctive competencies
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