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Strategic Management

Strategic Management
Originally called Business Policy Has three basic views Structuralist

Origin Industrial Organisation Economics Structure-conduct-performance paradigm Changes are caused by external environment (environmental determinism) Markets are 0 sum games & players compete Endogenous growth theory J.A.Schumpeter

Reconstructionist

New Growth theory

Strategic Management
Theories of organisational adaptation Population ecology: established organizations are unable to adapt to change. Eg: Ford / GM Institution theory: organizations adapt by imitating successful organizations. Eg: market challengers / followers, Eg: LG/Samsung Strategic choice perspective: organizations adapt to change and have the ability to reshape their environment. Eg: Air Deccan Organizational learning theory: organizations adapt defensively and use knowledge to improve their relationship with the environment. Eg: Jet Lite

Strategic Management

Phases

Phase 1: Basic financial planning


Yearly plans, based on the financial strength of the organisation with little information from outside Short term & done by low/middle level managers. Time horizon shifts to medium term external data used on an ad hoc basis done by middle managers gains political angle due to fight for resources

Phase 2: Forecast-based planning


Strategic Management

Phases

Phase 3: Externally oriented strategic planning

Top Management involvement begins aim is to respond to changing environment strategic / long term thinking extensive use of external data and analytical techniques like SWOT, BCG. Continuous process through flexible strategic thinking ( no more top down approach) detailed strategic plan including implementation evaluation and control, strategic info percolated through the organisation strategic process is initiated from the top but is interactive across the organisation.

Phase 4: Strategic management


Strategic Management
Requirements of a Strategic Organisation Strategic flexibility to plan & implement Learning organisation

Systematic problem solving Experiment new things Learn from experience Knowledge transfer

Leadership

Strategic Management
Learning organisation Technical skills. Eg: Intel Functional knowledge. Eg: HUL Marketing Managerial Expertise. Eg: Oberois

Strategic Management
a word of military origin, refers to a plan of action designed to achieve a particular goal four levels of warfare: political goals or grand strategy strategy operations tactics. strategy is concerned with how different engagements are linked, How a battle is fought is a matter of tactics.

Strategic Management
Chanakya's Arthashastra written in the 3rd century BC economic strategy Sun Tzu's The Art of War, written in China 2,500 years ago military strategy political strategy of Niccol Machiavelli's The Prince, written in 1513 Political strategy Competitive Strategy, by Michael Porter Business strategy

Strategic Management-Definition
a set of managerial decisions and actions that determines the long-run performance of a corporation (Hunger & Wheelen)

Process of monitoring and evaluating external opportunities and threats in light of companies strengths and weakness to set realistic & achievable objectives there by maximising resource utilisation

Strategic: relating to the identification of overall, long term aims & interest and means of achieving them Strategy: a plan of action designed to achieve overall aim Tactic: means by which strategy is carried out. Involve activities, in context to the situation, to move from one milestone to another towards the objective. Goal/ Objective

Strategic Management - Benefits


Clearer sense of direction for the firm Sharper focus on what is strategically important saves from myopia Improved understanding of a rapidly changing environment ability to survive unstable environment Improved organizational performance Achieves a match between the organizations environment and its strategy, structure and processes Organizational learning

Strategic Management

Challenges

Globalisation

Global organisations Global markets Global logistics Global knowledge BoP markets Cartalisation

Strategic Management

Challenges

Environmental sustainability

Regulatory risk Kyoto protocol, GHGS, Carbon trading Eg: green buses of Delhi Supply chain risk suppliers at risk of government regulation Product and technology risk Eg: banning of trans fats Litigation risk Eg: BP Reputation risk Dow Jones sustainability index, KLD Broad market social index, Eg: power generation PE Discounts Physical risk droughts, floods, fog

Strategic Management
Elements
1. 2. 3. 4.

Basic

Environmental scanning Strategy formulation Strategy implementation Evaluation and control

Strategic Management
Elements

Basic

Strategic Management

Model

Strategic Management
Environmental Scanning

Environmental Scanning is the


monitoring, evaluating and disseminating of information from the external and internal environments to key people within the organization Done through SWOT

Strategic Management
Environmental Scanning

Strategic Management
Formulation

Strategy

Strategy Formulation: the development of longrange plans for the effective management of environmental opportunities and threats in light of organizational strengths and weaknesses (SWOT) Mission- the purpose or reason for the organizations existence Vision- describes what the organization would like to become Objectives- the end results of planned activity

Strategic Management
Formulation

Strategy

Mission- the purpose or reason for the

What are you trying to achieve? / why are you in this business What your business does? P/S What is important to your business? Values it lives by Walt Disney: to be one of the worlds leading producer of entertainment and information. Using our portfolio of brands to differentiate our content, service & consumer products, we seek to develop the most creative, innovative & profitable entertainment experiences and related products in the world.

organizations existence. For the internal and investing public. Usually formulated by asking.

Strategic Management
Formulation

Strategy

Vision- the purpose or reason for the

organizations existence. For the customer public. Usually formulated by asking.

Why did I start the business? What I want to leave behind? Impression What is really being provided beyond P / S? What dreams can I have of the business? Walt Disney: to make people happy.

Strategic Management
Formulation

Strategy

Objectives- the end results of


planned activity.
action verbs that tell what is to be accomplished, by when? In What quantity?

Goals are also objectives without conditions. Eg: cost reduction. Common goals - Profitability, efficiency, growth, resource utilisation, ROE, ROI.

Strategic Management
Formulation

Strategy

Strategies- form a comprehensive master plan

that states how the corporation will achieve its mission and objectives May be implicit / unstated, and can be derived from the action of the management. Organisations uses a hierarchy of strategies Corporate stability, growth, retrenchment Business competitive & cooperative. Eg: Concor, Intel Functional Eg: R&D Strategy Tech leadership-sony, adaptation-Samsung.

Strategic Management
Formulation

Strategy

Strategic Management
Formulation

Strategy

Policies- the broad guidelines for

decision making that links the formulation of a strategy with its implementation. Eg: GE No: wherever it competes, strategy is core competence Eg; 3M all employees should spent 15% time on something other than primary project, strategy of product innovation

Strategic Management
Implementation

Strategy implementation: (also called operational planning) the process by

which strategies and policies are put into action through the development of: Programs Budgets Procedures

Strategic Management
Formulation

Strategy

Programs: statement of activities or steps needed to accomplish a part of the objective. It make the strategy action oriented. May involve restructuring, starting a new activity, changing something. Eg: outsource 70% of the production sell off unwanted plants. Here the objective is cost reduction, and strategy is retrenchment

Strategic Management
Formulation

Strategy

Budgets: statement of corporations programs in terms of money. Lists detailed costs of each program and used in planning and controlling. Procedures: SOPs system of sequential steps / technology that describes in detail how a part task or job is to be done. Eg: how to sell of unwanted plants / or outsource the production to contractors.

Strategic Management
& Control

Evaluation

Evaluation and control: the process in

which corporate activities and performance results are monitored so that actual performance can be compared to desired performance Performance: the end result of organizational activities Feedback/Learning Process: revise or correct decisions based on performance

Strategic Management
Events

Triggering

Strategy formulation is typically not a continuous process, Mintzberg. This can be explained by the human/organisational nature of Inertia. Strategic orientation is usually seen for 15 -20 years before making change punctuated equilibrium is shown by strategic management process. Long terms of stability (equilibrium) is punctuated by relatively short bursts of fundamental change (revolutionary period) by a triggering event

Strategic Management
Events

Triggering

Triggering event: something that acts as a stimulus for


a change in strategy and can include: New CEO. Eg: Jack Welsh, Lee Iacocca, Ratan Tata, Jobs External intervention. Eg: FIs in ITC. Threat of change of ownership. Eg: PSUs Performance gap. Eg: Home Ministry Strategic inflection point. Eg: Escorts India Ltd.

Strategic Management
characteristics What Makes a Strategic Decision? Strategic decision making focuses on the long-run
future of the organization Characteristics of strategic decision making include: Rare Consequential Directive

Strategic Management

modes

Mintzbergs Modes of Strategic Decision Making

Entrepreneurial mode: vision/mission of the founder acts as the strategic source. Eg: Jeff Bezos, Dhirubai Ambani, Michael Dell, Walter Disney. Adaptive mode: muddling through, characterised by reactive solution to existing problems, no proactive approach to Strategic Planning. Eg: eureka Forbes, encyclopedia

Strategic Management

modes

Planning mode: involves gathering of appropriate data for situation analysis, generation of feasible alternative strategies, rational selection & implementation of appropriate strategy. Involve reaction and proaction. Eg: IBM under CEO Louis Gerstner in 1993. Logical incrementalism (Quinn): synthesis of planning, reactive & entrepreneurial mode. Strategy formulation is partial & incremental and not total. Mission and Objective are set but strategy is allowed to emerge through debate, discussion and experimentation. Ideal for rapidly changing environment. Eg: HCL/Infosys.

Strategic Decision Making Process:


Analyze strategic (SWOT) factors Generate, evaluate and select the best alternative strategy Implement selected strategies Evaluate implemented strategies

1.

2.

3.

4.

Evaluate current performance results Review corporate governance Scan and assess the external environment Scan and assess the internal corporate environment

5.

6.

7.

8.

Strategic Decision Making Process:

Strategic Decision Making Process:

Elements of a good strategy


Arenas where we will be active? Vehicles how we will get there? Differentiators how will we win the market place? Staging what will be our speed and sequence of Economic logic how will we obtain our returns? Donald & Frederickson.
moves?

Strategic Audit
Strategic audit provides a checklist of questions, by
area or issue, that enables a systematic analysis to be made of various corporate functions and activities. (read appendix 1A.)

Discussion Questions

1. Why has strategic management become so important to todays corporations? 2. How does strategic management typically evolve in a corporation? 3. What is a learning organization? Is this approach to strategic management better than the more traditional top-down approach in which strategic planning is primarily done by top management? 4. Why are strategic decisions different from other kinds of decisions? 5. When is the planning mode of strategic decision making superior to the entrepreneurial and adaptive modes?

Example
Bajaj Auto

Environmental Scanning External

Environmental Scanning -

External

Why? Systems Theory Monitoring, evaluating & disseminating of relevant information from the external & environment to decision makers.

Environmental Scanning -

External

Which Environments Natural environment Societal environment Task environment Environmental uncertainty: is the degree of complexity & degree of change that exists in an organisations external environment

Environmental Scanning Natural environment


Physical resources Wildlife Climate

External

Environmental Scanning

External

Societal environment: social systems that influence long-term decisions


Economic forces Technological forces Political-legal forces Sociocultural forces

Differs country wise Differs industry wise

Environmental Scanning -

External

Environmental Scanning -

External

Industry analysis: An in-depth examination of key factors within a corporations task environment.

Environmental Scanning

External

Task environment: Groups that directly affect a corporation and are affected by the corporation
Government Local communities Suppliers Competitors Customers Creditors Unions Special interest groups/trade associations

Environmental Scanning -

External

Environmental Scanning Identifying External Strategic Factors

External

Issues priority matrix is used to identify and analyse developments in the external environment External strategic factors: Key environmental trends that are judged to have both a medium to high probability of occurrence and a medium to high probability of impact on the corporation Strategic myopia: the willingness to reject unfamiliar as well as negative information from the environment

Environmental Scanning -

External

Environmental Scanning substitutes

Task

Industry: a group of firms producing products that are close

The industry structure is most important in deciding competition, thus Influences profit potential Decides the strategy Perfectly competitive industry gives free market returns FMR = Risk free return + capital loss premium Nobody invests below adjusted FMR

Environmental Scanning -

Task

Environmental Scanning Porters five forces: Threat of new entrants Rivalry among existing firms Threat of substitute products Bargaining power of buyers Bargaining power of suppliers

Task

Relative power of other stakeholders (added)

Environmental Scanning a desire to gain market share and substantial resources.

Task

Threat of new entrants: New entrants to an industry bring new capacity,

Entry barrier: An obstruction that makes it difficult for a company to enter an industry Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale

Environmental Scanning Number of competitors Rate of industry growth Product or service characteristics Amount of fixed costs Capacity Height of exit barriers Diversity of rivals

Task

Rivalry among existing firms: New entrants to an industry bring new capacity, a desire to gain market share and substantial resources

Environmental Scanning services: Products that

Task

Threat of substitute products or appear different but can satisfy the same need as another product

Environmental Scanning bargain for higher quality, play competitors against each other. Large purchases Backward integration Alternative suppliers Low cost to change suppliers Product represents a high percentage of buyers cost Buyer earns low profits Product is unimportant to buyer

Task

Bargaining power of buyers: Ability of buyers to force prices down,

Environmental Scanning raise prices or reduce quality. Industry is dominated by a few companies Unique product or service Substitutes are not readily available Ability to forward integrate Unimportance of product or service to the industry

Task

Bargaining power of suppliers: Ability of suppliers to

Environmental Scanning Relative Power of Other Stakeholders


Government Local communities Creditors Trade associations Special interest groups Unions Shareholders Complementors: Products that work well with a firms product

Task

Environmental Scanning -

Task

Strategic group: A set of business units or firms that pursue similar strategies with similar resources

Environmental Scanning Strategic Types Defenders focus on improving efficiency Prospectors opportunities focus on product innovation

Task

and

market

Analyzers focus on at least two different product market areas Reactors lack a consistent strategy-structure-culture relationship

Environmental Scanning positions of companies within an industry

Task

Key success factors: Variables that can significantly affect the overall competitive

Industry matrix summarizes the key success factors within a particular industry

Environmental Scanning Uses of Structural Analysis

Task

To identify the potential factors that affect industry competition To assess the companies competitive position in the industry To develop an appropriate strategy (offensive/ defensive) to compete
Positioning Influencing the balance Exploiting change diversification

Competitive analysis tools


SWOT Porters industry Forces Strategic groups/ Competitive clusters Porters four corner exercise Tracy & Weisermas value discipline Gilads blind Spot

Competitive analysis tools

Competitive analysis tools

Competitive analysis tools


Finding the blind spot 1. Firm is unaware of a pending strategic development 2. Firm is aware, but misinterprets the strategic development 3. Firm correctly perceives the strategic development, but is too slow to react. Sources of blind spots are Invalid Assumptions, Winners Curse, Escalating Commitment, Constrained Perspective/Limited Frame of Reference, Overconfidence, Representative Heuristic/Reasoning by Analogy, Information Filtering

Environmental Scanning -

EFAS

Internal Scanning: Organizational Analysis

Internal Scanning

Organizational analysis is concerned with identifying and developing an organizations resources and competencies Identifies internal strategic factors/ resources that can be critical S/W in an organisations performance Also called internal environmental analysis

Internal Scanning

Resource Capabilities Competency Distinct competency

Internal Scanning
Resources assets that are building blocks of the organisation Tangible L/C/P/M Intangible patent/ culture/ reputation Human number/ motivation/ skill

Internal Scanning
Capabilities ability to use resources Consists of business process & routines that manage interaction among resources to convert I/P in to O/P Eg; marketing capability marketing specialist/ sales/ distribution Dynamic capabilities constantly change to adapt to changing environment

Internal Scanning
Competency cross functional integration & coordination of capabilities Eg: NPD Marketing, R&D, Production, Finance, HR, IT Amway/ Avon Personal Selling Fedex IT integration in to logistics Intel/ 3M NPD Apple design Competencies need to be constantly upgraded, else they become rigidity/ weakness

Internal Scanning
Distinct competencies core competencies superior to competitors GE- Management Development Reliance Project execution

Internal Scanning
Identifying Core and Distinctive Competencies

VRIO framework (Barney) Value does it provide customer value & competitive advantage? Rare do no other competitors process it? Imitability is it costly for others to imitate? Organization is the firm organised exploit the resources/

Internal Scanning
Access to a Distinctive Competency Asset endowment Acquired from someone else Shared with another business Built and accumulated within the company

Internal Scanning
Determining the Sustainability of an Advantage

Durability: The rate at which a firms underlying resources, capabilities, or core competencies depreciate or become obsolete Imitability: The rate at which a firms underlying resources, capabilities, or core competencies can be duplicated by others

Internal Scanning
Imitability

Transparency: The speed at which other firms under the relationship of resources and capabilities support a successful strategy. Eg: Gillette Transferability: The ability of competitors to gather the resources and capabilities necessary to support a competitive challenge. Eg: French wine Replicability: The ability of competitors to use duplicated resources and capabilities to imitate the other firms success. Eg: P&G Marketing capability

Internal Scanning
Determining the Sustainability of an Advantage

Explicit knowledge: Knowledge that can be easily articulated and communicated Tacit knowledge: Knowledge that is not easily communicated because it is deeply rooted in employee experience or in the companys culture

Internal Scanning

Internal Scanning
Using Resources to Gain Competitive Advantage Grants 5 step process

Identify and classify resources in terms of strengths and weaknesses Combine the firms strengths into specific capabilities and core competencies Appraise profit potential- Are there any distinctive competencies? Select the strategy that best exploits the firms capabilities and competencies relative to external opportunities Identify resource gaps and invest in upgrading weaknesses

Internal Scanning
Value Chain Analysis Value chain: A linked set of value creating activities that begin with basic raw materials coming from suppliers, moving on to a series of value-added activities involved in producing and marking a product or service, and ending with distributors getting the final goods into the hands of the ultimate consumer Upstream activities Down stream activities

Internal Scanning

Internal Scanning
Value Chain Analysis Companys centre of gravity Integration (Weyhauser & P&G/ Timberland)

Reduce cost Guaranteed access to RM Guaranteed access to distribution

differences among competitive value chains are a key source of competitive advantage

Internal Scanning

Internal Scanning
Functional resources & capabilities Organisational structures Corporate culture Marketing issues Financial issues R&D Capabilities Operational capabilities HRM IT & IS

Internal Scanning
Organisational structures Type of structure (functional/ divisional/ SBU/Conglomerate) Flexibility of the structure Structure & strategic support

Internal Scanning

Tom Burns & G M Stalker, in 1960s Organisational environment is of 2 types

Mechanical System

Jobs & responsibilities can be exactly broken down Environment is stable & DM is structured Performs same task continuously - specialised Use of bureaucratic control is ideal. Eg: manufacturing Unstable environment unstructured DM Non routine roles Non routine roles. Eg: Advertising

Organic system

Internal Scanning
Culture; shared values, beliefs, norms etc associated with an organisation Sense of identity Commitment generation Stability to the organisations social system Frame of reference for activities Cultural intensity & integration (p178 Matushita vs ABB)

Internal Scanning
Marketing Market position Marketing mix PLC stages Corporate brand & reputation

Internal Scanning
Financial issues Leverage Capital budgeting capabilities

Internal Scanning
R&D R&D Intensity Technical competence (ability to develop and use new technology) R&D Mix (basic/ product/ process) Technological discontinuity & strategy

Internal Scanning

Internal Scanning
Operations Manufacturing process & operating leverage Learning/ experience curve (cost reduction independent of economies of scale) Flexible manufacturing & mass Customisation Cad/ cam/ economies of scale

Internal Scanning
HRM Employee availability Employee capability Employee diversity Employee utilisation (tele commuting/ participative DM.) Unionisation

Internal Scanning
IT &IS Automation Integration (American Hospital Supplies) Security Intranet/ extranet/ internet/ web 2.0 usages

Internal Scanning

Situation Analysis: SFAS & SWOT

Situation Analysis: SFAS & SWOT


Strategy formulation concerns developing a corporations mission, objectives, strategies and policies Situation analysis: The process of finding a strategic fit between external opportunities and internal strengths while working around external and internal weaknesses SWOT: Strengths-Weaknesses-Opportunities-Threats Strategy= Opportunity/Capacity Opportunity has no real value unless a company has the capacity to take advantage of that opportunity
SA = O/ (S-W) SWOT is the most widely used tools after Porters 5 Forces

Situation Analysis: SFAS & SWOT


Generating a Strategic Factors Analysis Summary (SFAS) Matrix SFAS summarizes an organizations strategic factors by combining the external factors from the EFAS Table with the internal factors from the IFAS Table

Situation Analysis: SFAS & SWOT

Situation Analysis: SFAS & SWOT


Review of Mission and Objectives A re-examination of an organizations current mission and objectives must be made before alternative strategies can be generated and evaluated Mission & Objectives should lead to strategy EFAS/ SWOT/ TOWS may give strategic alternatives incompatible with the mission & objective

Situation Analysis: SFAS & SWOT


Performance problems can derive from inappropriate (narrow or too broad) mission statements and objectives
Mission may not provide common thread Objectives & strategies might be in conflict with each other Objectives may be too short term oriented Under such circum stances strategies or objectives need to be changed Eg: Boeing from largest to most profitable

Situation Analysis: SFAS & SWOT


Finding a Propitious Niche Propitious niche: where an organization can use its core competencies to take advantage of a particular market opportunity and the niche is just large enough for one firm to satisfy its demand

Strategic sweet spot: a company is able to satisfy customers needs in a way that rivals cannot

Strategic window: a unique market opportunity that is available for a particular time

Situation Analysis: SFAS & SWOT

Situation Analysis: SFAS & SWOT


Niches are not static They grow and attract competition Companies have to grow in to other niches under such circumstances Career Launcher; test preparation K12 Higher Education Vocational Training

Situation Analysis: SFAS & SWOT


TOWS matrix illustrates how the external opportunities and threats can be matched with internal strengths and weaknesses to result in four possible strategic alternatives:

Provides a means to brainstorm alternative strategies Forces managers to create various kinds of growth and retrenchment strategies Used to generate corporate as well as business strategies

Situation Analysis: SFAS & SWOT

Situation Analysis: Business Strategy

Corporate Strategy

Growth Stability retrenchment Competitive Cooperative

Business Strategy

Functional Strategy

Situation Analysis: Business Strategy


Business strategy focuses on improving the competitive position of a companys or business units products or services within the specific industry or market segment it serves. Business strategy is comprised of: Competitive strategy Cooperative strategy Corporate strategy decides where to compete and the Business strategy decides how to compete.

Situation Analysis: Business Strategy Competitive strategy: questions? What should be the competitive advantage? (lower cost/ differentiation) What should be the competitive scope? (broad / narrow)

Situation Analysis: Business Strategy


Lower cost strategy: The ability of a company or a business unit to design, produce and market a comparable product more efficiently than its competitors. Differentiation strategy: The ability of a company or a business unit to provide a unique or superior value to the buyer in terms of product quality, special features, or after sale service Competitive scope: the breadth of the companies target market

Situation Analysis: Business Strategy

Situation Analysis: Business Strategy

Large Firms: should choose broad scope so that ROA can be maximized Small firms: should choose narrow scopes so that they can concentrate their resources

Situation Analysis: Business Strategy Cost Leadership Creates entry barriers Large volumes Bargaining power Survive in heavy competition Walmart/ dell/ McDonald/ big bazaar

Situation Analysis: Business Strategy Differentiation Gives higher margins Segment specialisation & customer intimacy Creates entry barriers Nike/ BMW/ Apple..

Situation Analysis: Business Strategy


Risks of competitive strategy No clear difference between them over long period Eg: McDonalds Loss of position: Eg: Deere Cost Proximity Imitation Technology changes allowing cost focus & differentiation together Stuck in the middle situations Eg: K-Mart

Situation Analysis: Business Strategy

Situation Analysis: Business Strategy


Industry Structure and Competitive Strategy

Fragmented industry: Many small- and medium-sized companies compete for relatively small shares of the total market
Products are typically in early stages of product life cycle Focus strategies are used

Situation Analysis: Business Strategy


Industry Structure and Competitive Strategy Consolidated industry: Domination by a few large companies
Emphasis on cost and service Economies of scale Regional and national brands Slower growth over capacity Knowledgeable buyers
(Hyper competition)

Situation Analysis: Business Strategy


Competitive Tactics Tactic: A specific operating plan that details how a strategy is going to be implemented in terms of when and where it is to be put into action Narrower in scope and shorter in time horizon than strategies
Timing Tactics Location Tactics

Situation Analysis: Business Strategy


Timing Tactics: When to Compete Timing tactics: When a company implements a strategy First movers Late movers Market Location: Where to Compete Market location tactics where a company implements a strategy: Offensive tactics in a competitors market space Defensive tactics in home markets

Situation Analysis: Business Strategy


Offensive tactics Frontal assault Kimberly Clark / P&G Flanking maneuver Intel / TI Bypass attack Sony / Apple Encirclement SAP / Oracle Guerrilla warfare Defensive tactics Raise structural barriers Increase expected retaliation Lower the inducement for attack

Situation Analysis: Business Strategy


Cooperative strategies are used to gain a competitive advantage within an industry by working with other firms Collusion: The active cooperation of firms within an industry to reduce output and raise prices to avoid economic law of supply and demand Strategic Alliances: A long-term cooperative arrangement between two or more independent firms or business units that engage in business activities for mutual economic gain.

Situation Analysis: Business Strategy


Strategic alliance is used to Obtain or learn new capabilities Obtain access to specific markets Reduce financial risk Reduce political risk

Situation Analysis: Business Strategy


Types of Cooperative Agreements Mutual service consortia Joint venture Licensing/ franchising arrangements Value-chain partnerships

Corporate strategy

Corporate strategy
Decides Firms overall orientation towards G/S/R (direction) Industries or markets in which the firm competes through its Products/ Business (portfolio) Coordination of resource flow between Products/ Business (Parenting)

Corporate strategy
Corporate strategy: The choice of direction of the firm as a whole and the management of its business or product portfolio and concerns: Directional strategy Portfolio analysis Parenting strategy

Corporate strategy - Directional


Answers Should you expand, continue or cutback Should we concentrate or diversify Expand where & how?

Corporate strategy - Directional

Corporate strategy - Directional


Growth Organic

Product Market Usage Acquisition Alliance

Inorganic

Corporate strategy - Directional


Growth Increases experience Betters learning curve Reduces costs Increases profits Helps survive shake out Growth begets growth Growth reduces threats

Corporate strategy - Directional


Growth Strategy Concentration
Vertical: F/W Venkys, ABC; B/W - Nirma Horizontal

Diversification
Concentric Conglomerate

Corporate strategy - Directional


Concentration Strategies

Vertical growth is taking over the function previously provided by a supplier or by a distributor. Ensures
reduced cost control over supplies guarantee quality access to customers.

Corporate strategy - Directional


Concentration Strategies Vertical integration: The degree to which a firm operates vertically in multiple locations on an industrys value chain from extracting raw materials to manufacturing to retailing
Backward integration is assuming a function previously provided by a supplier (increases assets & exit barriers) Forward integration is assuming a function previously provided by a distributor (reduces the return on assets)

Corporate strategy - Directional


Concentration Strategies Transaction cost economies: Vertical integration is more efficient than contracting for goods and services in the marketplace when the transaction costs of buying on the open market become too great

Corporate strategy - Directional

Corporate strategy - Directional


Full integration: A firm internally makes 100 per cent of its key suppliers and completely controls its distributors Taper integration: A firm internally produces less than half of its own requirements and buys the rest from outside suppliers Quasi-integration: A company does not make any of its key supplies but purchases most of its requirements from outside suppliers that are under its partial control. Long-term contracts: Agreements between two firms to provide agreed-upon goods and services to each other for a specific period of time

Corporate strategy - Directional


Horizontal growth: Expansion of operations into other geographic locations and/or increasing the range of products and services offered to current markets. Horizontal growth is achieved through:
Internal development Acquisitions Strategic alliances

Horizontal integration: The degree to which a firm operates in multiple geographic locations at the same point on an industrys value chain

Corporate strategy - Directional


International entry options for horizontal growth:
Exporting Licensing Franchising Joint venture Acquisitions Greenfield development

Corporate strategy - Directional


Concentric (Related) diversification:
Growth into a related industry when a firm has a strong competitive position Strategic fit/ synergy of current K/S/Capability Product market synergy is a common driving force

Conglomerate (Unrelated) diversification:


Growth into an unrelated industry Management realizes that the current industry is unattractive Firm lacks outstanding abilities or skills that it could easily transfer to related products or services in other industries Sound investment/ value oriented management is the driving force

Corporate strategy - Directional


Controversies of Growth Strategy

Is concentration better or diversification? Is concentric diversification better than conglomerate diversification? Is vertical growth better than horizontal growth? Is internal growth better or external? How to reduce risk in growth strategies?

Corporate strategy - Directional


Stability Strategies Viewed some times as lack of strategies Ideal in predictable environment Useful in the short run

Corporate strategy - Directional

Stability strategies: Continuing activities without any significant change in direction


Pause/Proceed with caution strategy: An opportunity to rest before continuing a growth or retrenchment strategy eg: Dell/ Indian Banks currently No change strategy: Continuance of current operations and policies eg: Small Retailers Profit strategies: To do nothing new in a worsening situation but instead to act as though the companys problems are only temporary and support profitability

Corporate strategy - Directional


Retrenchment strategies are used when the firm has a weak competitive position in some or all of its product lines from poor performance. Turn around Captive company strategy Sell out/ divestment Bankruptcy/ liquidation

Corporate strategy - Directional


Turnaround strategy emphasizes the improvement of operational efficiency when the corporations problems are pervasive but not critical

Contraction: Effort to quickly stop the bleeding across the board but in size and costs

Consolidation: Stabilization of the new leaner corporation

Corporate strategy - Directional


Captive company strategy: Company gives up independence in exchange for security

Sell-out strategy: Management can still obtain a good price for its shareholders and the employees can keep their jobs by selling the company to another firm

Divestment: Sale of a division with low growth potential

Corporate strategy - PA

Tells which business/ product resources should be invested Simple to use Helps constant/ profitable juggling of the portfolio Helps in setting the direction of the business/ product

Corporate strategy - PA
Portfolio analysis: Management views its product lines and business units as a series of investments from which it expects a profitable return. Popular portfolio analysis techniques include:
BCG Matrix GE Business Screen

Corporate strategy - PA

Corporate strategy - PA
BCG Matrix Question marks: New products with the potential for success but require a lot of cash for development Stars: Market leaders at the peak of their product cycle and are able to generate enough cash to maintain their high market share and usually contribute to the companys profits Cash cows: Products that bring in far more money than is needed to maintain their market share. Dogs: Products with low market share and do not have the potential to bring in much cash.

Corporate strategy - PA
BCG MatrixLimitations Use of highs and lows to form categories is too simplistic Link between market share and profitability is questionable Growth rate is only one aspect of industry attractiveness Product lines or business units are considered only in relation to one competitor Market share is only one aspect of overall competitive position

Corporate strategy - PA

Corporate strategy - PA
GE Business ScreenLimitations Complex and cumbersome Numerical estimates of industry attractiveness and business strength/competitive position give the appearance of objective, but are actually subjective judgments that can vary from person to person. Cannot effectively depict the positions of new products and business units in developing industries.

Corporate strategy - PA
Advantages of Portfolio Analysis Encourages top management to evaluate each of the

corporations businesses individually and to set objectives and allocate resources for each Stimulates the use of externally oriented data to supplement managements judgment Raises the issue of cash flow availability to use in expansion and growth

Corporate strategy - PA
Limitations of Portfolio Analysis Defining product/market segments is difficult Suggest the use of standard strategies that can miss opportunities or be impractical Provides an illusion of scientific rigor when in reality positions are based on objective judgments Value-laden terms such as cash cow and dog can lead to self-fulfilling prophecies Lack of clarity on what makes an industry attractive or where a product is in its life cycle

Corporate strategy - PA