5. str. mgmt. process

Strategy Management

The Strategic Management Process

Dr. B. K. Mukherjee 2

The Strategic Management Process

Top management in an enterprise plays a very important role in the formal Strategic Planning process which has the following main steps. These steps need to be followed sequentially:

EVALUATECurrentMissionGoalStrategy

Scan Int.Envment-Core comp.- Synergy- Value Creation

IdentifyStr.factors-Strengths-Weak- nesses

FORMULATEStrategy-Corporate- Business- Functional

SWOT

Scan Ext.Envment- National- Global

IdentifyStr.factors- Opports.- Threats

DefineNew:- Mission- Goals- Grand Strategy

IMPLEMENTStrategy viaChanges in-Leadership/ Culture- Structure- Human Res.- Info/Control systems


The Strategic Management ModelMAIN STEPS IN STRATEGIC PLANNING:

1. EVALUATE/SELECT the corporate mission and corporate goals. Scan/analyze the organization's external competitive environment to identify opportunities and threats. Scan/analyze the organization’s internal operating environment and identify the organization’s strengths and weaknesses. If necessary, define the new mission, goal and grand strategy.

2. FORMULATE strategies at the Corporate, Business and Functional levels that

- build on the organization’s strengths, and

- correct its weaknesses, in order to take advantage of external opportunities and counter external threats.

3. IMPLEMENT the strategy through changes in organizational leadership or culture, corporate performance, structure, human resources or ethics.


Strategy Evaluation - The TOWS Matrix

Internal Factors

External Factors

ExternalOpportunities (O)

External Threats (T)

Internal Strengths (S) Internal Weaknesses (W)

eg, stregths in Mfg, R&D, Engg/Tech., Marketing, Finance, HR, etc.

Weaknesses in areas shown

Heinz Weihrich: “TOWS Matrix – A Tool for Situational Analysis”, 1982

SO Strategy: Maxi-Maxi Utilizing organization’s strengths to take advantage of opportunities – potentially most successful strategy Eg.,RELIANCE ,(KELLOGGS)

WO Strategy: Mini-Maxi Developmental strategy to overcome weaknesses and take advantage of opportunities eg., RASNA v/s TANG

ST Strategy: Maxi-Mini

Use of strengths to cope with/ avoid threats. eg., MANGOLA

WT Strategy: Mini-Mini Retrenchment, Liquidation or Joint Venture to minimize both weaknesses and threats. eg., GOLD SPOT


Strategy Formulation - The Ansoff Matrix

H.Igor Ansoff’s ‘Product - Market Expansion Matrix, HBR, 1957 [Ref: Aaker David, Ch.11]

MA

RK

ET

S

PRODUCTSExisting Products New Products

ExistingMarkets

NewMarkets

Market Penetration Strategy

Market Development Strategy

Product Development Strategy

Diversification Strategy

• Increase Market share by - creating a SCA (Sustainable Competitive Advantage) with enhanced customer value.• Increase product usage through - increase in frequency of use, - increase in quantity of use, and - new applications for current users.

• Add product features, product refinement• Develop a new-generation product• Develop new (related) products for the same market (through brand extension).

• Expand geographically• Target new segments

• Related• Unrelated

Review of opportunities for improving the existing businesses’ performance


Hierarchy of Organizational Strategy

FORMULATING STRATEGIES: Corporate levelMulti-business corporations have to consciously decide as to what lines of

businesses they would like to be in. If, at the same time, they are Multi-national corporations then they have to also decide which countries they would like to do business in. These decisions are of crucial importance which have a direct bearing on the fortunes of the enterprise and are made at the Corporate level.

Functional level

Business level

Corporate levelMultibusiness Corporation PepsiCo Inc.

SBU-5

Sports DrinksDole juicesLipton Tea

SBU-4

Other BeveragesTropicana, Aquafina

SBU-1

Soft DrinksPepsi, Mountain Dew, Slice

R&D Mfg Marketing HRD Finance

SBU-3

SnacksFrito Lay,

Rolled Gold Pretzels

SBU-2

Quaker Oats

PepsiCo were also into the Restaurants business(Taco Bell, Pizza Hut, KFC) but have now divested.


Corporate level StrategiesPORTFOLIO STRATEGY

The firm decides on a mix of business units and product-lines that fit together in a logical way to provide synergy and competitive advantage for the corporation.

Such a balanced mix of business divisions are called Strategic Business Units (SBUs).

Each SBU may have a unique business mission, product-lines, competitors and markets relative to the other SBUs (eg. SBUs of Hindustan Lever are Soaps & Detergents; Personal products; Fats & culinary items; Animal feeds; Beverages; Frozen foods; Speciality chemicals; Agribusiness; and Exports.)

Bruce Henderson, President, The BOSTON CONSULTING GROUP (BCG) and his team in 1970, evaluated SBUs with respect to two dimensions, namely- Business growth rate, i.e., how rapidly is the entire industry increasing, and- Market share, showing whether a business unit has larger or smaller share than its competitors.

The combinations of Growth and Share provide four categories of SBUs for a Corporate portfolio.


The BCG Matrix

The BCG Growth-Share Matrix, 1970Low

71

2

5

High LowMarket Share

Bus

ines

s G

row

th R

ate

STARSRapid Growth And Expansion

QUESTION MARKSNew ventures, Risky –a few go on to become Stars, others divested

CASH COWSMilk to financeQuestion Marks and Stars

DOGSNo further investment,Keep if profitable.Consider divestment

34

6


Analysis of the BCG Matrix

The combinations of Growth and Share, as seen in the BCG Matrix, provide four categories of SBUs for a Corporate Portfolio:

1.1. The The ‘STAR’ ‘STAR’ enjoys enjoys large large market share in a market share in a rapidly growing rapidly growing industry – industry – important because of important because of additionaladditional growth potential. Profits should be growth potential. Profits should be ploughed back ploughed back into the business for future growth and profits. Stars into the business for future growth and profits. Stars are visible and are visible and attractiveattractive, hence to be , hence to be nurtured nurtured and developed.and developed.

2.2. The The ‘CASH COW’ ‘CASH COW’ is a is a dominantdominant business in a business in a maturemature, , slow-growth slow-growth industry with a industry with a large large market share, hence heavy investments in market share, hence heavy investments in advertising and expansion are advertising and expansion are no longer requiredno longer required. Profits to be . Profits to be invested in other riskier businesses.invested in other riskier businesses.

3.3. The The ‘QUESTION MARK’ ‘QUESTION MARK’ exists in a exists in a newnew, , rapidly growing rapidly growing industry but industry but has only a has only a small small market share. Hence market share. Hence riskyrisky, could become a Star or , could become a Star or could fail. Profits from Cash Cows may be invested in QMs in order could fail. Profits from Cash Cows may be invested in QMs in order to to nurture nurture them into future Stars.them into future Stars.

4.4. The The ‘DOG’ ‘DOG’ is a is a poor performerpoor performer, enjoys , enjoys small small share of a share of a slow-growth slow-growth market and brings in little profit to the company. May be market and brings in little profit to the company. May be divesteddivested..

Most corporations have businesses in Most corporations have businesses in more than one more than one quadrant, where quadrant, where circle size represents the relative circle size represents the relative size size of each business.of each business.


Business level Strategies

Prof. Michael E. Porter of the Harvard Business School studied a number of business organizations and proposed that business level strategies are a result of five competitive forces in the company’s environment which help determine a company’s position vis-à-vis competitors.

INDUSTRY COMPETITORSRivalry among existing firms

POTENTIAL NEW ENTRANTS

SUBSTITUTES

SUPPLIERS BUYERS

Threat of New entrants

Threat of substitute productsfrom other industry

Bargaining power of Suppliers

Bargaining power of Buyers

PORTER’S FIVE FORCES MODELCompetitive Forces that determine

Industry Profitability


Porter’s Five Forces Model1. Threat of Potential new entrants: Capital requirements and

economies of scale are examples of two potential “barriers to entry”, eg,Automobile industry v/s small mail-order business, Times of India v/s Hindustan Times and DNA.

2. Bargaining power of buyers: ‘Informed’ customers become empowered customers because they now have a range of options at the market-place, eg, Eco-labeling. This situation is more pronounced if there are one or two large, powerful customers.

3. Bargaining power of Suppliers: Concentration of suppliers and availability of substitute suppliers are significant factors – whether supplier can survive without a particular purchaser or whether purchaser can threaten to self-manufacture the product.

4. Threat of substitute products: If the industry has a few close substitutes (eg, Coffee industry v/s Tea, Soft drinks or Fruit juices, all serving the customer needs for non-alcoholic drinks), then the customer may switch preferences due to cost changes, increased health-consciousness or any other such reason.

5. Rivalry among competitors: Scrambling and jockeying for position, eg, Pepsi v/s Coke ad campaigns.


Functional level StrategiesPorter’s Value Chain

M A R G I N

M A R

G I N

Firm Infrastructure

Human Resources Management

Technology Development

ProcurementIn

boun

dLo

gist

ics

Ope

ratio

ns

Out

boun

d Lo

gist

ics

Mkt

g. &

Sale

s Service

Primary Activities

Supp

ort A

ctiv

ities

MFG.

SCM CRM

The Porter’s Value Chain (“Competitive Advantage”, 1985)provides a valuable tool for identifying ways to create more customer value. Every firm is a collectionof activities performed to design, produce, market, deliver and support its product.The Value Chain identifies nine strategically relevant activities that create value and cost in a business.


The Porter’s Value ChainPRIMARY ACTIVITIESThese comprise of the sequence of bringing materials into the

business (Inbound Logistics), converting them to final products (Operations), shipping out final products (Outbound Logistics), marketing them (Marketing & Sales), and servicing them (Service). All these are Line functions.

SUPPORT ACTIVITIESThese are activities handled for the entire organization by certain

specialized departments, hence these are Staff functions. Infrastructure covers the costs of general management,

planning, finance, accounting, legal, and govt. affairs that are borne by all the primary and support activities.

Procurement involves the sourcing of various inputs for each primary activity.

Similarly, Human Resources Mgmt and Technology Development are specialized activities covering all areas of the firm’s business.


The Porter’s Value Chain (contd.)

COMPETITIVE ADVANTAGE

The firm’s task is to examine its costs and performance in each value-creating activity and look for ways to improve it.

This is done by estimating its competitor's costs and performance as “benchmarks”. To the extent it can improve its performance vis-à-vis competitors, it can achieve competitive advantage.

HOW TO LEVERAGE COMPETITIVE ADVANTAGE

Emphasis on close coordination and cooperation in areas involving cross-functional inputs, eg, marketing and production.

Close monitoring and sustained improvements in core business processes, such as:

New product realization process Inventory management process Order-to-remittance process Customer service process.

Economy & Finance

5. str. mgmt. process