5 TASKS OF STRATEGIC MANAGEMENT: • Developing strategic vision and mission • Setting objectives • Developing a strategy • Implementing and executing the strategy • Evaluating performance and initiating corrective

adjustments STRATEGIC MANAGERS Mintzberg’s Organizational Design:

General Managers - responsible for the overall performance of the

company

Functional Managers – responsible for supervising particular

function/task in the company

As a manager remember you’re the authority and responsibility • Business is not a game like “Monopoly” • Die or survive: Survival of the fittest! • You have the a responsibility to your staff, organization and

the society

Functions of Management

Multidivisional Company

Competitive Advantage Who does it better?

• Distinguishes one company to another • Superior performance compared to competitors

Competitive advantage over other companies can be described when profitability is greater than their average profit growth M. Porter’s two basic types of competitive advantage:

Cost Advantage – similar product at lower cost; process innovation

Differentiation Advantage – premium price from unique product or service; premium price strategy

How is it sustained?

When strategies enable the company to maintain above profitability and market share for a long period

When a company consistently outperforms its rivals in the industry

When a company serves its market better than anybody else

Strategic Planning Process

1. Select Corporate mission and vision 2. Analyse external competitive environment 3. Analyse the organization’s internal operating environment 4. Select strategies that build on the organization’s strengths

and correct its weaknesses 5. Implement strategies

SWOT Analysis

Internal Analysis • Strengths • Weaknesses

External Analysis • Opportunities • Threats

An Art of War “Know the enemy and know yourself; in hundred battles you will win and never be peril. When you are ignorant of the enemy but know yourself, your chances of winning or losing equal. Know neither your enemy nor yourself, you are certain in every battle to be in peril.” - Sun Tzu A Chinese military treatise written during 6th century BC

Chapters of the book are:

Application:

War is a matter of vital importance to the state; a matter of life and

death, the road either is to survive or be in peril. Hence it is

imperative that it be thoroughly studied.

-Sun Tzu

How to do SWOT:

1. Self Analysis

1.1 Decide who to involve

1.2 Brainstorm the issues

1.3 Evaluate issues that have been identified

1.4 Create a simple, clear action plan

1.5 Review prior to decision making

2. Strengths

2.1 Sound Finances

2.2 Marketing

2.3 Management and Personnel Skills

2.4 Strengths in Production

3. Weaknesses

3.1 Poor Financial Management

3.2 Lack of Marketing Focus

3.3 Management and Personnel Weaknesses

3.4 Inefficient Production

4. Opportunities

4.1 Broader Business Environment

4.2 Political Trends

4.3 Economic Trends

4.4 Social Developments

4.5 New Technology

5. Threats

5.1 Broader Business Environment

4.2 Political Trends

4.3 Economic Trends

4.4 Social Developments

4.5 New Technology

6. Action

ANALYZING THE EXTERNAL ENVIRONMENT

The Parts of External Environment Analysis:

1. Scanning - Identifies early signals of environmental changes

2. Monitoring - Detecting meaning through ongoing

observations of environmental changes and trends

3. Forecasting - Developing projections of anticipated

outcomes based on monitored changes and trends

4. Assessing - Determining the timing and importance of

environmental changes and trends for fims’ strategies

An opportunity is a condition in the general environment that if

exploited effectively, helps a company reach strategic

competitiveness

The General, Industry, and Competitor Environments

PESTEL Analysis

Political Factors

Political Instability

Economic Conditions

Inflation Rates

Interest Rates

Trade Deficits or Surplus

Personal Savings rate

Business savings rate

GDP

Money Supply

Sociocultural Forces

Workforce Diversity

Attitudes about work and life

Career Preferences

Shifts in products and services

Population Size

Age Structure

Geographic Distribution

Ethnic Mix

Income Distribution

Technological Factors

Product Innovations

New Communication Strategies

Environmental Factors

Energy Consumption

Availability of Natural Resources

Production of environment friendly products

Legal/regulatory conditions

Antitrust Laws

Taxation Laws

Deregulation Laws

Environment protection Laws

Trade Regulations

The purposes of competition are: survival, increase market share;

and increase profitability

Scanning the External Environment

5 FORCES OF COMPETITION

Industry is a group of firms producing products that are close

substitutes

Threat of New Entrant

Barriers to Entry:

Economies of Scale – incremental efficiency improvements

through experience as a firm grows larger. Cost of

producing each unit declines as the quantity of product

produced increases

Product Differentiation – Product uniqueness

Capital Requirements – competing in a new environment

requires a firm to have resources to invest.

Switching Costs – onetime costs customers incur when they

buy from a different supplier

Access to distribution channels – effective distribution

of products takes some time. New entrants have to

persuade distributors to carry their products.

Cost Disadvantages Independent of Scale – Established

competitors have cost advantages that new entrants

cannot duplicate

Government Policy– the government can control the

entry to an industry. They restrict entry to some

industries because of the need to provide quality

service or the desire to protect jobs.

Expected Retaliation - Companies seeking to enter an

industry should expect reactions from rival firms

Predatory Pricing occurs when a firm sells services/product at a

lowest price to eliminate competition

Bargaining Power of Supplier

A supplier group is powerful when:

It is dominated by a few large companies and is more

concentrated than the industry to which it sells

Satisfactory substitute products are not available to

industry firms

Industry firms are not significant customer for the supplier

group

Suppliers’ goods are critical to buyers’ marketplace success

The effectiveness of suppliers’ products has created high

switching costs for industry firms

It poses a credible threat to integrate forward into the

buyers’ industry.

Bargaining Power of Buyers

Buyer Groups are powerful when:

They purchase a large portion of an industry’s total output

They could switch to another product at a little, if any cost

The industry’s products are undifferentiated or

standardized

Threat to Substitute Products

Goods and services from outside a given industry that perform

similar or the same functions as a product that the industry

produces

Intensity of Rivalry among Competitor

Numerous or Equally Balanced Competitors

Slow Industry Growth

High Fixed Cost or High Storage Cost

Lack of Differentiation or Low Switching Cost

High Strategic Stakes

High Exit Barriers

M. Porter’s 5 Forces of competition model

Competitor Analysis

Future Objectives:

• How do our goals compare with our competitor’s goals?

• Where will emphasis be placed in the future

• What is the attitude towards risk

Current Strategy

• How are we currently competing?

• Does their strategy support changes in the competitive

structure?

Assumptions

• Do we assume the future will be volatile?

• Are we operating under a status quo?

• What assumptions do our competitors hold about the

industry and themselves?

Capabilities

• What are our strengths and weaknesses

• How do we rate compared to our competitors?

Response

• What will our competitors do in the future?

• Where do we hold our advantage over our competitors?

• How will this change our relationship with our competitors?

The knowledge about these four dimensions helps the

firm prepare an anticipated response profile for each

competitor.

Help a firm understand, interpret, and predict

competitors’ actions

Understanding competitors’ actions contributes to the

firm’s to compete successfully

External Factor Analysis Summary (EFAS)

Notes: 1. List opportunities and threats (5–10 each) in column 1.

2. Weight each factor from 1.0 (Most Important) to 0.0 (Not

Important) in Column 2 based on that factor’s probable impact on

the company’s strategic position. The total weights must sum to

1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in

Column 3 based on the company’s response to that factor. 4.

Multiply each factor’s weight times its rating to obtain each factor’s

weighted score in Column 4. 5. Use Column 5 (comments) for

rationale used for each factor. 6. Add the weighted scores to

obtain the total weighted score for the company in Column 4. This

tells how well the company is responding to the strategic factors in

its external environment.

Interpreting Industry Analysis:

The purpose of Industry Analysis is to understand an

industry’s competitive realities

Determine the industry’s attractiveness in terms of

potential to make profit

Achieve strategic competitiveness and earn above average

returns

“I have been impressed by the urgency of doing. Knowing is not

enough; we must apply. Being willing is not enough; we must do.”

- Leonardo da Vinci

ANALYZING THE INTERNAL ENVIRONMENT

Individual firms must possess resources and capabilities that

other companies do not

Resources are source of capabilities that lead to core

competencies (that leads to competitive advantage)

Resource, Capabilities, and Core Competencies

Foundations of competitive advantage

Resource are bundles to create organizational capabilities

Capabilities are the source of a firm’s core competencies –

which are basis for competitive advantages

Resources

Tangible:

Financial Resources

- The Firm’s Capacity to borrow

- The Firm’s ability to generate funds through internal

operations

Physical Resources

- Sophistication of a firm’s plant and equipment and the

attractiveness of its location

- Distribution facilities

- Product Inventory

Technological Resources

- Availability of technology-related resources such as

copyright, patents, trademarks and trade secrets

Intangible:

Human Resources

- Knowledge, trust, skills, abilities to collaborate

Innovation Resources

- Ideas, scientific capabilities, capacity to operate

Reputational Resources

- Brand name, product quality, durability and reliability

Capabilities

Distribution

- Effective use of logistics management techniques

Human Resource

- Motivating, empowering, and retaining employees

MIS

- Effective and efficient control of inventories through point

of purchase, data collection, methods

Marketing

- Effective promotion of brand-name products

- Effective Customer Service

- Innovate Merchandising

Management

- Ability to envision the future of the industry/business

Manufacturing

- Design and production skills and quality

R&D

- Innovative technology

- Rapid transformation of technology into a new products

and processes

Core Competencies

Criteria of Sustainable Competitive Advantage

Valuable Capabilities – Help a firm neutralise threats or

exploit opportunities

Rare Capabilities – Not possessed by many others

Costly to imitate Capabilities – a valuable brand name

Non-Substitutable capabilities – No strategic Equivalent

Value Chain Analysis

M. Porter’s Value Chain Analysis

A three step analysis

Activity

Analysis

Value Analysis E&P

Order taking • Fast answer to

phones

• Knowledge of

Customers

• Understand

needs

accurately

• Manage

expectations

• 3 ring rule

• Team updates on

clients

• Conduct training

on client industry

• Provide client

briefing at every

call

Specification • Accurate

comprehensive

description of

changes

• Training in

technical writing

• Conduct team

huddle once a

• Easily

understandabl

e

week

Scheduling • Timely job start • Contingency time

in schedule

Generated Values:

Confidence

Loyalty

Peace of mind

Security

The BCG Matrix

Strategies:

Build market share

Hold strategy

Harvest

Divest

WHY COMPANIES FAIL

Inertia

Objects will remain at rest or in a uniform motion in a straight line

unless acted upon by an external unbalanced force

Companies find it difficult to change its strategies and structure

when adapting to change

Prior Strategic Commitments

It does not just limits a company to imitate its rivals but may also

create competitive advantage

The Icarus Paradox

Becoming so specialized and inner directed firms and lose sight of

market realities

STEPS TO AVOID FAILURES

Focus on Building Blocks of Competitive Advantage

Focus on efficiency, quality, innovation and responsiveness to

customers

Institute Continuous learning and improvement

Learn from prior mistakes and seek out ways to improve processes

overtime

Track best industrial practice and use Benchmarking

Build and maintain the capabilities that underpin excellence

Overcome Inertia

Overcome internal forces which are barriers to change within an

organization

The role of luck

In the face of uncertainty, some businesses just happen to pick up

the correct strategy

Attaining Superior Reliability

1. Improved quality - Costs decrease because of less work,

fewer mistakes, fewer delays and better use of time and

materials

2. Better quality - Higher market share and allows a company

to raise prices

3. Increase in profitability - Allows a firm to stay in business

4. Creates employment

Steps for Quality Improvement Program

• Mistakes, defects and poor quality materials are not

acceptable

• Provide employees appropriate training/skills for the job

• Fear not in reporting or recommending improvements

• Standards should not be defined by quotas but by quality

production

• Commitment

STRATEGIES AT THE BUSINESS LEVEL

Market Segmentation

The way a company decides to group customers, based on

important differences in their needs or preferences

INDUSTRY ENVIRONMENT AND BUSINESS-LEVEL STRATEGY

Strategies for Consolidating Fragmented Industries

Chaining

Franchising

Horizontal Merger

IT and the Internet

Navigating Through Life Cycle to Maturity

Embryonic Strategies

Investment needs are great because a company has to establish a

competitive advantage

Growth Strategies

The goal is to maintain a relative competitive position in a rapidly

expanding market – grow with the expanding market

Shakeout Strategies

Companies attempt to maintain and increase market share despite

fierce competition

Strategies to deter entry: Strategies for consolidating a

fragmented industry

Product Proliferation - Filling the niches or catering to the

needs of customers in all market segments

Price Cutting- Sends signal to new entrants that they will

meet price cuts. Keeps out an entrant

Maintain Excess Capacity - Maintain physical capability to

produce more product than customers currently demand

Strategies for Managing Rivalry

Price Signaling - First means by which a companies attempt

to control rivalry among competitors so as to allow the

industry to choose the most favorable pricing option

Price Leadership - One company assumes the responsibility

for setting the price option that maximizes industry

profitability

Nonprice Competition - Product differentiation strategy

Capacity Control - Prevents accumulation of excess capacity;

Overcapacity maybe caused by competitive factors within

an industry

Strategies in Declining Industries

Intensity of Competition

Speed of decline

Height of exit barriers

Level of fixed costs

Commodity nature of product

Performance and Governance

Corporate governance essentially involves balancing the interests of

the many stakeholders in a company

Stakeholders and Corporate Performance

Stakeholder and the Enterprise

Stakeholder Impact Analysis

1. Identify the stakeholders

2. Identify Stakeholders’ interests and concerns

3. Identify what claims stakeholders are likely to make on the

organization

4. Identify the stakeholders who are most important from the

organization’s perspective

5. Identify the resulting strategic challenges

Agency Theory

Looks at the problem that can arise in a business

relationship when one person delegated decision making

authority in another

Formulated to capture the relationship between managers

and stockholders

The Agency Problem

Information asymmetry arises due to the delegated decision

making authority

The interests of principals and agencies are not always the

same

CORPORATE GOVERNANCE

Good Corporate Governance

Rules and practices that govern the relationship between

managers and shareholders and stakeholders

Ensures transparency fairness and accountability

Prerequisite for the integrity and credibility of market

institutions

Allows corporation to have access to external finance and

make reliable commitments to creditors

Central principle of transparency and accountability which

are crucial to the integrity and legal credibility of our market

system

We need to develop governance tools and incentive structures that

are more robust in the face of rapid financial innovation, and

procedures that leave no doubt as to the stakes involved.

Accounting standards need to become principle-based, rather than

based on rules that invite evasion.

Governance Mechanisms

Aligns incentives between principals and agents and

monitor control agents

Ensure that agents act in a manner that is consistent with

the best interests of principals

Main types of Governance Mechanisms

Board of Directors

- Directly elected by stockholders and under corporate law

they represent the stockholders’ interests

- Reduce information asymmetry

Stock-Based Compensation

- The right to buy company’s shares

- To motivate managers to adopt strategies that increase the

share price of the company

Financial Statements and Auditors

- To give consistent, detailed and accurate information about

how efficiently and effectively managers are running the

company

The Takeover Constraint

- The risk of being acquired by other company

- Limits the extent to which managers can pursue strategies

and take actions that put their own interests above the

stockholders

- If they ignore the stockholder interests and the company is

acquired, managers lose their independence and probably

their job

Governance Mechanisms inside a Company

Strategic Control System

Primary governance mechanisms established within a company to

reduce the scope of the agency problem.

Establish standards and targets against which performance

is measured

Create systems for measuring and monitoring performance

on a regular basis

Compare actual performance against the established

Evaluate results and take corrective actions if necessary

Balanced Scorecard

A strategic performance management framework that has been

designed to help an organization monitor its performance and

manage the execution of its strategy.

Financial information is important but not enough by itself

Evaluates the four building blocks of competitive advantage

Efficiency – measured by the level of production cost productivity of

labor, productivity of capital and the cost of raw material

Quality – number of rejects, number of defective products and

returned product level of productivity

Innovation – number of new products introduced, the percentage of

revenues generated from new products, productivity of research

and development

Responsiveness to customers – number of repeat customers, level of

on-time delivery, level of customer service

Balanced Scorecard Perspectives:

The Financial Perspective

Covers financial objectives of an organization and allows managers

to track financial success and shareholder value

The Learning and Growth Perspective

Covers the customer objectives such as customer satisfaction,

market share goals as well as product and service attributes

The Customer Perspective

Covers internal operational goals and outline the key processes

necessary to deliver the customer objectives

The Internal Process Perspective

Covers the intangible drivers of future success such as human

capital, organisational capital and information capital

Balanced Scorecard Benefits:

Better Strategic Planning

Provides a powerful framework for building and communicating

strategy. The process of creating a Strategy Map ensures that

consensus is reached over a set of interrelated strategic objectives.

Improved Strategy Communication & Execution

The fact that the strategy with all its interrelated objectives is

mapped on one piece of paper allows companies to easily

communicate strategy internally and externally.

Better Management Information

Forces organisations to design key performance indicators for their

various strategic objectives. This ensures that companies are

measuring what actually matters.

Improved Performance Reporting

Increasing needs and requirements for transparency can be met if

companies create meaningful management reports and dashboards

to communicate performance

Better Strategic Alignment

In order to execute a plan well, organisations need to ensure that all

business and support units are working towards the same goals.

Cascading the Balanced Scorecard into those units will help to

achieve that and link strategy to operations.

Better Organisational Alignment

Well implemented Balanced Scorecards also help to align

organisational processes such as budgeting, risk management and

analytics with the strategic priorities.

Coordination

“Coordination is the integration of several parts into an

orderly hole to achieve the purpose of understanding.”

Charles Worth

“Coordination is orderly arrangement of group efforts to

provide unity of action in the pursuit of common goals.”

Mooney & Reelay

A manager can be compared to an orchestra conductor since both

of them have to create rhythm and unity in the activities of group

members.

Coordination is an integral element or ingredient of all the

managerial functions.

a. Co-ordination through Planning - Planning facilitates co-ordination by integrating the various plans through mutual discussion, exchange of ideas. e.g. - co-ordination between finance budget and purchases budget.

b. Co-ordination through Organizing - Mooney considers co-ordination as the very essence of organizing. In fact when a manager groups and assigns various activities to subordinates, and when he creates department’s co-ordination uppermost in his mind.

c. Co-ordination through Staffing - A manager should bear in mind that the right no. of personnel in various positions with right type of education and skills are taken which will ensure right men on the right job.

d. Co-ordination through Directing - The purpose of giving orders, instructions & guidance to the subordinates is

served only when there is a harmony between superiors & subordinates.

e. Co-ordination through Controlling - Manager ensures that there should be co-ordination between actual performance & standard performance to achieve organizational goals.

Strategic Management

“Management’s job is not to see the company as it is.. but

as it can become.”

John W. Teets

“A strategy is a commitment to undertake one set of actions

rather than another.”

Sharon M. Oster

“Without strategy the organization is like a ship without a

rudder, going around circles.”

Joel Ross and Michael Kami

Business Model

A plan for the structure and actions by which your

organization will operate in its marketplace

Enables the firm to generate growth opportunities

Capture the opportunities quickly and profitably

How firm makes money and acquires market share

Business Model vs Strategy

Business Model – concerns whether the revenues and costs from

the strategy; demonstrate that the business can be profitable and

viable

Strategy – deals with a company’s competitive initiatives and

business approaches

Why is strategy needed?

To proactively shape how a company’s business will be

conducted

To mold the independent actions and decisions managers

and employees into a coordinated, companywide game plan

3 Elements of Strategic Vision

Use the mission statement as a starting point

Develop a strategic vision that spells out a course to pursue

Communicate the vision in a clear an exciting manner

The Mission Statement

Defines current business activities

Conveys

o Who are we

o What we do

o Where we are

A company’s mission is not to make a profit. The real mission is

always – what will we do to make a profit.

Managerial Value of a Well-Conceived Strategic Vision and Mission

Crystallizes long-term direction

Reduces risk of rudderless decision making

Conveys organizational purpose and identity

Keeps direction related actions of lower level managers on common path

Helps organization prepare for the future Setting Objectives: Second Task of Strategic Management

Converts strategic vision and mission into specific performance targets

Creates yardsticks to track performance

Pushes firm to be inventive and focused on results

Helps prevent complacency

Provides a set of benchmarks for judging organizational performance

Provides a results-oriented decision making Objectives are needed at all levels. The Hows That Define a Firm's Strategy

How to please customers

How to respond to changing market conditions

How to outcompete rivals

How to grow the business

How to manage each functional piece of the business and

develop needed organizational capabilities

How to achieve strategic and financial objectives

Do strategies evolve? Why?

There is always an ongoing need to react to

Shifting market conditions

Fresh moves of competitors

New technologies

Evolving customer preferences

Political and regulatory changes

New windows of opportunity

Crisis situations

Implementing and Executing Strategy: The Fourth Task of Strategic

Management

Taking actions to put a freshly chosen strategy into place

Supervising the ongoing pursuit of strategy

Improving the competencies and efficiency with which the

strategy is being executed

Showing measurable progress in achieving the targeted

results and objectives

Monitor, Evaluate and Take Corrective Action: Fifth Task of

Strategic Management

How well is the firm doing in its financial budgets

How well is it meeting consumer needs

How well competitive is it

How well the firm is responding to competitive pressures

How well has the firm responded in the operating

environment