introduction to strategic management

LECTURE 1 : Introduction to Strategic Management

Dr.K.Prabhakar

8/10/2011Strategic Management 1-1

STRATEGIC MANAGEMENT

This presentation is dedicated to all my students

the only capital I have


• Why do some firms succeed while others fail?– A central objective of strategic management is to learn

why this happens.• What is strategy?

– An action a company takes to attain superior performance. In this context it means allocations of resources. Resources may be same but if they are combined in different ways some get superior performance; some get ordinary performance. Strategic Management studies the ways to make superior performance.

• What is the strategic management process?– The process by which managers choose a set of

strategies for the enterprise to pursue its vision.


Overview

What's the use of running if you are not on the right road- German proverb

If you do not know where you come from, you do not know where you stand, if you do not know where you stand, you do not know where you go- Chinese Proverb

To run in a right road to reach your destination is strategy.


Philosophy

However beautiful the strategy, you should occasionally look at the results -Sir Winston Churchill 1874-1965, English statesman

Do not repeat the tactics which have gained you one victory, but let your methods be regulated by the infinite variety of circumstances -Sun Tzu c. 490 BC, Chinese military strategist


Prespective Quote


What is difference between Walmart ,Subhiksha and Future Group?

Sam Walton started it in the year 1962. For the fiscal year ending January 31, 2011, Wal-

Mart reported a net income of $15.4 billion on $422 billion of revenue with a 24.7% gross profit margin)Net profit margin3.78%

Operating margin6.05% EBITD margin-7.87% Return on average assets-9.09%R Return on average Equity22.09% Employees2,100,000


What are the results of Wal-Mart?

Location Information systems Logistics Human Resources Practices; Empolyee stock

options at a discounted price to that of market price

Bar code technology and checkout scanners Shifting unsold stock EDLP Low Prices from Suppliers- Information to

Suppliers


What Wal-Mart is known for?


Analyse its financial results


Walmart (WMT) Target (TGT) Costco (COST) Family Dollar (FDO)

Revenue Growth 8.57% 6.51% 9.28% 8.76%

Avg. Gross Margin 23.83% 32.58% 12.44% 33.87%

Operating Margins 5.83% 7.51% 2.72% 6.74%

Net Margin 3.4% 4.27% 1.75% 4.25%

Dividend Growth 18.11% 13.03% N/A 10.6%

EPS Growth 11.28% 10.07% 9.4% 10.02%

FCF Growth 29.4% N/A N/A 69.90%

Payout Ratio 29% 20% 26% 23%

Cash Payout Ratio 30.05% 12.18% 19.86% 21.62%

Share BuyBacks -3.57% -4.65% -1.67% -5.7%

Current Ratio 0.87 1.63 1.16 1.57

Book Value $18.81 $20.33 $24.56 $10.41

Total Debt / Equity 0.52 0.75 0.20 0.18

Avg. Return on Equity 20.77% 18.89% 12.51% 19.62%

Avg. Cash Return on Capital 6.25% 1.36% 6.31% 14.86%

5 Year Avg. Low p/e 14.01 12.39 17.05 11.79

Current p/e (ttm) 14.8 16.68 24.20 16.38

Current p/e (forward) 13.29 14.04 21.22 13.76

You can see here the movie that projects the negative image about Wal Mart.


http://www.youtube.com/watch?v=dp0O9jxLS64

http://www.youtube.com/watch?v=dp0O9jxLS64

Rated as the 50 fastest growing business to be observed in the world

Started by IIT IIM graduate and Professionally managed.

Ajim Premji Invested in the organization rama bijapurkar was in the board Ultimately left with lost of court cases and

operations are closed across India.


Subhikha

Do you know the from where the CEO of Big Bazar got his idea? It is from Saravan Stores in Chennai; Saravana Stores operates on

EDLP Mode and everyone goes there for low prices with high quality.

It has on thousand shops across India in 70 cities. Its formats are Its formats include; 1.Pantaloons 2.Big Bazaar-Indian hypermarket chain 3. Food Bazaar- which is a supermarket chain 4.Central, which is

a chain of destination malls. 5.Brand Factory 6. Blue Sky 7. aLL 8.Star 9.Sitara. Read his book ” It happened in India”.


Future Group


Future Group Vs others

Dr.Devdutt Patnaik is an Atheist turned mythologist.

He is the Chief Belief Officer at Future Group.

He uses mythology to bring to life different aspects of corporate life.

Future group looks for Duryodhana’s in organization

Definition of Duryodhana- “Duryodhanas are employees who play by the rules but whose intentions and integrity are questionable.


Future Group’s Management with Mythology

You need to be familiar with Geetha. Its focus is Do you work or Dharma and do not

expect results! It is something quiet opposite to the market

economics. How does it work in India with Globalization? It works! It worked wonders for Future group. The Concept of Dharma does have its roots in caste

system; for time being we should suspend its painful impact on Indian society.

However, the concept of Dharma has many good aspects and it has been accepted in Future group.


Observe the slide given in the next slide

Some of them are internalized in the Indian psyche.

Athidi Devobhava- Guest is the God. Anna data sukibhava – The person who

gives food should always be great. (Comments are by me) Think on these lines and give your ideas.


How to enshrine the customers as Gods?

“Retail is our religion. Customers are our gods. The stores are our temples. In every temple, there are rituals, there are customs. We have to enshrine customers as our gods in our minds. Devdutt will dip into Indian mythology and help us create these rituals, symbols and vocabulary,” says Biyani, who, in his own words, is a “borderline atheist” who has neither prayed since his early teens nor visited a temple. But that does not stop him from understanding or harvesting the power of mythology in a country where there is an auspicious time, method and place for doing everything—waking up, bathing, marrying and even dying.


Philosophy of Kishore Biyani and role of Devdutt

Take the Kartha ceremony the group has put in place. Kartha in Sanskrit means creator or the head of a family. Every time somebody is hired to head a Future Group store, he or she is anointed as a Kartha. That does not just translate to a fancy designation on a rectangular visiting card. It’s much more. “We seat the Kartha on a chair and all the employees stand around him. His family members—wife, siblings and parents—are invited to the ceremony. His boss reads him out his duties as a Kartha, which is to ensure the welfare and happiness of employees and customers,” - Sanjoy Jog, Chief People Officer, Future Group.

It just aligns the mind of the person who has all these aspects ingrained in him.

Question: Do we have neurological basis for this? Read the book “Habit: the 95% of Behavior Marketers Ignore”


Manager is known as Kartha

They demacdonandized the retailing in India. Example: No women in north India likes a

person to put saree on her shoulder to see herself in the mirror. However, it will be a cutomer delight in Tamilnadu for a women to see the saree being put on her shoulder. Same country two strategies to meet customer needs.

Can you imagine single largest retails stores in the world to have highest trunover?

It is Nalli Silks. ( We will study Nalli case study soon)


What Future Group did?

“Biyani has great intuition about the intuitive sense of India. What I have is a vocabulary. We clicked because our understanding of Indian-ness matched,” says Pattanaik, who believes that Indian businesses are aping the west by putting too much emphasis on “processes” over intuition and culture. “You cannot standardise a smile.

We cannot and should not have standard operating proceedures for something which should be natural.


The success of Future group is substituing processes with intution and Culture

Subhisha had the same access towards resources as future group.

However, Future Group used it differently. It brings out the difference between

resources and resourcefulness. Coke formula was sold by Pemberton for

2300$ and died as a papuer in Atlanta; Presently its brand value is 150 billions!

( Please read http://www.slideshare.net/kprabhakar975/difference-between-2300116billion-entrepreneurship )


Subhiskha and Future Group

http://www.slideshare.net/kprabhakar975/difference-between-2300116billion-entrepreneurship




655 VS552 VS 347 Air Craft South West Airline Model (Low cost Model) Revenue Management Model ( British

Airways later poineered by American Airlines )

Indian Airlines


American Airlines South West Airline Vs US Airways

Strategy is a set of related actions that managers take to increase organization’s performance.

If it results in superior performance to that of its rivals it is said to have competitive advantage.

Example: Wal Mart, American Airlines, Airtel


Strategy (Operationalization)

What is a strategy? How to create strategies that lead to

superior performance? How to implement? How you have to relate to the environment? Why strategy?


What you will learn?

How to most effectively manage a organizational strategy making process to create competitive advantage.


Strategic Leadership

Unless a variety of opinions are laid before us, we have no opportunity of selection, but are bound of necessity to adopt the particular view which may have been brought forward

Herodotus, 5th century BC, Greek historian


Prespective Quote

• SMP is the process by which managers select and then implement a set of strategies that aim to achieve a cometitive advantage.

• Strategy formulation is selection of strategies • Strategy implementation is the task of

putting strategies in to action; it includes designing; delivering; and supporting products; improving efficienty and effectiveness of organiztions; desinging organizational structure; Control systems and culture.


Strategy Making Process

Strategy formulation is is 10% implementation is 90%.


Prespective Quote

Rational planning by top management?


Strategic Planning

Defining the Mission and Setting Top-Level Goals

External Analysis of Opportunities and Threats

Internal Analysis of Strengths and Weaknesses

Selection of Appropriate Strategies

Implementation of Chosen Strategies

Basic Strategic Planning Model


What are elements of Strategic Thinking?

• Mission– Sets out why the organization exists and what it

should be doing from point of view of customer.• Major goals

– Specify what the organization hopesto fulfill in the medium to long term.

• Objectives – Are objectives to be attained that lead to superior

performance.


Mission and Goals

Perception is strong and sight is weak. In strategy it is important to see distant things as if they were close and to take a distanced view of close things.Miyamoto Musashi 1584-1645, legendary Japanese swordsman


Prespective Quote on Vision

Identify strategic opportunities and threats in the operating environment.


External Analysis

Identify strengths◦ Quality and quantity of resources available◦ Distinctive competencies

Identify weaknesses◦ Inadequate resources◦ Managerial and

organizational deficiencies


Internal Analysis

• Cost leadership– Attaining, then using the lowest total cost basis as

a competitive advantage; Example of Intel • Differentiation

– Using product features or services to distinguish the firm’s offerings from its competitors;Apple Computers

• Market niche focus– Concentrating competitively on a specific market

segment; Nala Appakadai


Business-Level Strategies

Focus is on improving the effectiveness of operations within a company.◦ Manufacturing◦ Marketing◦ Materials management◦ Research and development◦ Human resources


Functional-Level Strategies

Multidomestic International Global Transnational


Global-Level Strategies

Vertical integration Diversification Strategic alliances Acquisitions New ventures Business portfolio restructuring


Corporate-Level Strategies

In real life, strategy is actually very straightforward. You pick a general direction and implement like hell-Jack Welch in Winning, 2005


Prespective Quote

• Designing organizational structure• Designing control systems

– Market and output controls– Bureaucratic controls– Control through organizational culture– Rewards and incentives

• Matching strategy, structure, and controls– Congruence (fit) among strategy,

structure, and controls


Strategy Implementation

The only constant is change. Success requires adapting strategy and

structure to a changing world.


Managing Strategic Change

General managers◦ Responsible for the overall (strategic)

performance and health of the total organization. Operations managers

◦ Responsible for specific businessfunctions or operations.


Strategic Managers


Strategic Managers for All Levels

Vision, eloquence, and consistency Commitment to the vision Being well informed Willingness to delegate and empower Astute use of power Emotional intelligence


Strategic Leadership

Strategy making in an unpredictable world◦ Creates the necessity for flexible strategic

approaches. Strategy making by lower-level managers

◦ Strategy evolves through autonomous action. Serendipity and strategy

◦ Accidental discoveries and happenstances can have dramatic effects on strategic direction.

Intended and emergent strategies◦ Realized strategies are combinations of

intended and emergent strategies.


Strategy as an Emergent Process


Intended and Emergent Strategies

FIGUR 1.3

Mintzberg’s Intended Strategy and

Emergent Strategy Five P’s of Strategy 1. Plan2. Ploy3. Pattern4. Position5. Prespective



The Strategic Management Process for Intended and Emergent Strategies

FIGURE 1.4

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1857795

Please read case study by me on 3M


Planning under uncertainty◦ Scenario planning for dynamic environmental

change Ivory tower planning

◦ Lack of contact with operational realities◦ The importance of involving operating managers◦ Procedural justice in the decision-making process

Engagement, explanation, and expectations Planning for the present: Strategic Intent

◦ Recognition of the static nature of the strategic fit model

◦ Strategic intent in focusing the organization on winning by achieving stretch goals


Strategic Planning in Practice

• Cognitive biases systematically influence the rationality of decision makers;Psychologists have articulted more than fifty cognitive biases.


Improving Strategic Decision Making

FIGURE 1.5 ( Adopted from Strategic Mangement by Hill and Jones, 2009 e )

I claim not to have controlled events, but confess plainly that events have controlled me- Abraham Lincoln 1809-1865, sixteenth American president


Illusion of Control

Pitfalls of groupthink◦ Failing to question underlying assumptions.◦ Coalescing around a single person or policy.◦ Filtering out conflicting information.◦ Developing after-the-fact rationalizations.◦ Having an emotional (nonobjective)

commitment to an action.


Groupthink and Strategic Decisions

Two decision-making processesthat counteractcognitive biases and groupthink.


Techniques for Improving Decision Making

FIGURE 1.6

How to create strategic alternatives How to select alternative that is most

suitable for organization Implement the strategies that will help the

stakeholders to maximise their wealth.


At the end of the course You will uderstand