Core concepts In Strategic Management

KOTHARI ABHISHEK BHARAT 2012PGP172 SECTION-E PGP-1

References: Strategic Management: Hitt , Ireland, Hoskisson Integrated management::Charles W.L. Hill, Gareth R. Jones

Planning Triggers:
a) Economies of Scale are marginal improvements in efficiency a firm experiences as it incrementally increases in size Unit cost reductions associated with a large scale of output. It is achieved through: Internal economies of scale Mass producing a standardised output Spreading fixed costs over large output Discounts on bulk purchases and raw materials Spreading marketing and advertising costs over large output External economies of scale (minor impact) Better transport and communication-SEZ Training and education becomes industry focussed-ITI Growth of allied industries: Growth of vendors around Manesar plant->affordable suppliers close to site Examples: Microsoft using one time investment on R & D on operating system to make large copies of CDs Car manufacturers

b) The Cost Leadership strategy is an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to competitors Wal-mart Dell

Risks with cost leadership: Good service/product becoming obsolete because of competitors innovation Loss of underlying customers perceptionloss of value for customers Imitation

c) Focus strategy is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment. Aim is to cater to serve a particular segment more effectively then industry wide competitors

Particular buyer group Different product line Different geographic market

a) Focused cost leadership: Ikea: low-cost modular furniture, fewer sales representatives, customers transport their own furniture b) Focused differentiation strategy: serving one or two niche markets Porsche against GM in sports /luxury category Risks with focus: Competitors focus on more narrow product Needs of customer become like industry wide customers

d) Economies of scope are cost savings that the firm creates by successfully transferring some of its capabilities and competencies that were deployed in one of its business to another of its businesses It is created through two basic kind of operational economies: sharing activities(operation relatedness) and corporate core competencies(corporate relatedness) sharing activities: distribution channels, same raw materials acquisition/production, Banks corporate core competencies: technical knowhow :Franchising

e) Differentiation is an integrated set of activities taken to produce goods or services at an acceptable cost that customers perceive as being different in ways that are important to them. The relative importance they attach to satisfaction of different needs and for what they are willing to pay a premium. Differentiation: unusual features, responsive customer service, rapid product innovations and technological leadership Dell :Customisation BMW: prestige, luxury, reliability

Risks with Differentiation: customers may find prices very high imitation counterfeit products

Trade Off:
a) Switching costs are onetime costs customers incur when they buy from a different supplier. It varies as a function of time. Customer loyalty programs can help to reduce switching
high transaction costs in closing an account with one bank and opening another with a competitor Compatibility with existing system

b) Relative strategic importance of demand/offer determines how much a firm has to invest compared to the rival firm. The importance a firm gives to the particular demand project depends upon the firms assessment of its resources and the tradeoffs associated with the offer While assigning the resources (economic/human) to the project the firm has to see whether they are in lieu with companys objectives and long term goals. c) Relative Competitive Capabilities are the capabilities one firm has in comparison with other rival firms in the market Each company has its own resources and capabilities which are unique to the firm .The better the value a firm can create compared to the rival firm and add value to the system determines which firm fares better

d) Competitive retaliation: Whenever a company enters in a market the existing players to protect their share retaliate to deter the new entrant from entering Also when an existing player comes with a new strategy to gain market dominance there is a counter reply from the incumbent known as competitive retaliation First mover: A firm that takes an initial competitive action to build or defend its competitive advantages or to improve its market position. First movers can gain: The loyalty of customers who may become committed to the firms goods or services. Market share that can be difficult for competitors to take during future competitive rivalry Second mover responds to the first movers competitive action, typically through imitation Late mover responds to a competitive action only after considerable time has elapsed. Any success achieved will be slow in coming and much less than that achieved by first and second movers.

Large firms are likely to initiate more strategic actions during a given time period

e) Relative superiority of alternatives: Whenever the threat of alternatives is high the profitability suffers. The better alternative of the competitor tougher is the competition i market and we cannot take advantage of it and have to come out with different strategy The better the relative value of alternative, the tighter is cap on industrys profit potential Buyers switching costs is low

Firm Activities:
a) Value chain is a template firms use to understand their cost position and to identify the multiple means that might be used to facilitate implementation of a choice of a business strategy Value chain is mainly divided into Primary activities and Support activities Value chain shows how product moves from raw material stage to final customer
Input
research and development production marketing and sales customer service

Output

Company infrastructure

Informations Systems

materials managment

Humanresources

Movement along Value chain

b) Extend Span of control: refers to the no of subordinates that report to a manager. The greater the span of control the greater would be the number of subordinates reporting to him.

1. Narrow span of control: Narrow Span of control means a single manager or supervisor oversees few subordinates. This gives rise to a tall organizational structure. 2. Wide span of control: Wide span of control means a single manager or supervisor oversees a large number of subordinates. This gives rise to a flat organizational structure. There is an inverse relation: narrower the span, the greater is the number of levels in an

organization Narrow span of control is more expensive as compared to wide span of control as there are more number of superiors and therefore there are greater communication problems between various levels of management. The ideal span of control depends upon various factors, such as: 1. 2. 3. 4. 5. Nature of an organization Nature of job Skills and competencies of manager Employees skills and abilities The kind of interaction

The Boston Consulting Group has a distinctive approach to flattening the corporate pyramid which involves the extending of spans of control for managers at all levels

c) The total set of actions taken by all firms competing within a market is called competitive dynamics It depends on the competitive speed in different markets (slow, fast and standard cycle) on behaviour of all the competitors Slow cycle markets are those in which the competitive pressures do not readily penetrate the firms resources of strategic competitiveness Competitive advantages are shielded from imitation for long periods of time and imitation is costly. A monopolistic market like situation

Fast Cycle markets: The firms competitive advantages arent shielded from imitation because imitation happens quickly and somewhat inexpensively Competitive advantages arent sustainable Competitors do reverse engineering

Standard Cycle markets: Moderate cost of imitation may shield competitive advantages. Competitive advantages are partially sustainable if their quality is continuously upgraded Seek large market share Build brand loyalty

d) Modes of operation: Own, JV, Partnerships Sole Ownership is a type of business entity that is owned and run by one individual and in
which there is no legal distinction between the owner and the business.

Owner is responsible for all profit and losses Difficult to find capital Fewer govt restrictions Not Subject to corporate taxation

A Joint venture (JV) is a business agreement in which corporations agrees to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets. It is a corporate entity Mostly done by foreign companies to enter in India: TATA-AIG,TVS-Suzuki Subject to corporate taxation A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business It is a closed entity It is not listed Not subject to corporate taxation

Leverage aspirations and internal resources:

Analysis of firms internal environment finds firm as a bundle of heterogeneous resources and capabilities that can be used to create an exclusive market position, A firm has some resources and capabilities which other companies do not have or at least not in same combination. How to leverage resources and capabilities is a key outcome decision makers have to make.

Problems:
a) Path dependence: a process is said to be path dependent when events in evolution of process have significant effects on subsequent events. It suggests that a firm may gain a competitive advantage in current period based on the acquisition and development of resources in earlier period

Another view suggests that current core capabilities may become core rigidities and current capabilities constraint the development of new capabilities.

b) Barriers to exit are economic, strategic and emotional factors that prevent firms from leaving an industry. Industry Easy to enter
Intense Rivalry

Difficult to exit

Industry Difficult to enter

Moderate Rivalry

Difficult to exit

High Exit barriers Demand declines Excess productive capacity

More intense rivalry and more price competition Common Exit Barriers: Investments in specific Assets: Expense associated with writing-off items of plant and
machinery

High fixed costs: severance pay, health benefits and pensions Emotional attachments of owners Economic dependence on single industry Legal regulations: e.g. bankruptcy regulations as in US.

c) Stage of firm: initiation, growth and exit: An industry life cycle model has five stages: Embryonic: Low growth, high prices due to inability to reap profits, lack of technical knowhow among competitors Growth: First-time demand expands rapidly, prices fall, new firms enter Industry Shakeout: Demand approaches saturation levels, intense rivalry

Maturity: Minimising costs, building brand loyalty Decline: Growth becomes negative due to technological substitution, social changes, and international competition

Embryonic shakeout Growth Maturity Decline/Exit

d) Buyer/Supplier Segments:
A Buyer segment is a collection of an organizations customers who all share similar needs. Businesses segment their customers into needs-based groups in order to tailor their products/services or messages to better satisfy them

Buyer segmentation is done on basis of Geography - such as where in the world was the product bought. Psychographics - such as lifestyle or beliefs. Socio-cultural factors - such as class. demography - such as age, sex, and so on Supplier segments: Breaking suppliers into different groups to segment based on what the suppliers can do versus objectives and then to invest in those suppliers to be able to drive value helps organizations to align allocation of limited resources with their strategic goals It helps in clarifying roles, responsibilities, actions and expectations of both the parties Helps in building preferential relationship with different suppliers and thus better allocation and utilization of limited management time resources. Types of Supplier segments: Bottleneck supplier Strategic supplier Routine supplier Collaborative supplier