Strategic Management

Strategic Management
Module-I (Introduction)
1
Module I (Objectives)
• To understand the meaning, scope and nature of Strategy and Strategic
Management
• To understand the concept of planning and strategic management process
• To understand how Strategic Management has evolved over years to its current
state today
• To get familiar with major milestones and contributors to the discipline of
• To understand the hierarchy and pattern of strategy development
• To understand the significance and use of Michael Porter’s value chain model
Module I (Contents)
• Concept of Planning
• Evolution of Strategic Management
• Corporate Strategy
• Patterns of Strategy Development
• Levels of Strategy
• Competitive Scope and Value Chain

Managerial Challenges
Start up Challenges Progress Challenges
•Think Big •Forget
•Start Small •Borrow
•Scale up •Learn
Evaluation of Management Concerns
Focus Operation Resources Conception Performance Change
Concern Efficiency Risk Position Execution Renewal
Budgeting & Long Range

Response Procedures Planning Strategy Excellence in Innovation
Execution
Phase-I Phase-II Phase-III Phase-IV Phase-V

1950s 1960s & 1970s 1980s 1990s 2000 onwards
Understanding Strategy
“Strategy, the art of war, is especially the planning of
movement of troops and ships, into favorable
positions; plan of action or policy in business or
policies”
Oxford Pocket Dictionary

“Strategy is determination of long term goals and
objectives of an enterprise and the adoption of
courses of action and the allocation of resources
necessary for carrying out these goals”
Alfred Chandler
‘Strategy & Structure’
“Strategy is a set of managerial decisions and
actions involved in making a major market-creating
business offering”
W. Chan Kim
‘INSEAD Faculty’
“What Business Strategy is all about is, in one word –
Competitive Advantage. The sole objective of
Strategic Planning is to enable a company to gain, as
efficiently as possible, a sustainable edge over its
competitors. Corporate Strategy thus implies an
attempt to alter a company’s strength relative to that
of its competitors in the most efficient way”
Kenichi Ohmae
‘The Mind of the Strategist’
STRATEGY IS DEFINED AS THOSE ACTIONS THAT A
COMPANY PLANS, IN RESPONSE TO, OR IN
ANTICIPATION OF, CHANGES IN ITS EXTERNAL
ENVIRONMENT, ITS CUSTOMERS AND ITS
COMPETITORS.
STRATEGY IS A WAY COMPANY AIMS TO IMPROVE ITS

POSITION VIS-À-VIS COMPETITION.
Strategy narrowly defined as “ the art of general” (Greek StratAgos).
It defines “what we want to achieve” & chart out course of action, to

survive & sustain growth in changing environments.
Strategy is a set of Key decisions made to meet Objectives.

Domain of Strategy
strategic competitiveness and above normal returns

concerns managerial decisions and actions which materially affect the
success and survival of business enterprises
involves the judgment necessary to strategically position a business
and its resources so as to maximize long-term profits in the face of
irreducible uncertainty and aggressive competition
strategy is the linkage between a business and its current and future
environment
Common Elements in Successful Strategy
Source: Adapted from Robert S. Grant, 1991
Successful
Strategy
EFFECTIVE IMPLEMENTATION
Profound Objective
Long-term, simple
understanding of appraisal of
and agreed upon
the competitive resources
objectives
environment
$
Thinking Strategically
• Answers to the following define an overall direction for the
organization's grand strategy
 Where is the organization now?
 Where does the organization want to be?
 What changes are among competitors?
 What courses of action will help us achieve our goals?
Understanding Strategic Management
• Strategic or institutional management is the conduct of drafting,
implementing and evaluating cross-functional decisions that will
enable an organization to achieve its long-term objectives
• It is the process of specifying the organization's mission, vision and
objectives, developing policies and plans, often in terms of projects
and programs, which are designed to achieve these objectives, and
then allocating resources to implement the policies and plans, projects
and programs.
• Strategic management is a level of managerial activity under setting
goals and over Tactics.
• Strategic management provides overall direction to the enterprise and
is closely related to the field of Organization Studies
• According to Arieu (2007), "there is strategic consistency when the
actions of an organization are consistent with the expectations of
management, and these in turn are with the market and the context."
• “Strategic management is an ongoing process that evaluates and
controls the business and the industries in which the company is
involved; assesses its competitors and sets goals and strategies to meet
all existing and potential competitors; and then reassesses each
strategy annually or quarterly [i.e. regularly] to determine how it has
been implemented and whether it has succeeded or needs replacement
by a new strategy to meet changed circumstances, new technology,
new competitors, a new economic environment., or a new social,
financial, or political environment.” (Lamb, 1984:ix)
Managers ask such questions as...
What changes and trends are occurring?
Who are our customers?
What products or services should we offer?
How can we offer these products or services
most efficiently?
Concept of Planning
• Concept 1: Organisations need a planning architecture.
A planning architecture is an overview of how different planning

processes fit together.
It identifies:
• different types of plan
• the time horizon of each
• when they have to be completed
• time allowed for preparing the plan
• the frequency of updating
• who is responsible
• how the different plans fit together.
A Planning Architecture
Concept 2: Planning is an intellectual process.
Concept 3: Planning is a social process.
The Strategic Management Process
Strategic Management Process
Scan External Identify Strategic Factors –
Environment – Opportunities, Threats
National, Global
Implement
Strategy via
Evaluate Current Formulate Changes in:
Mission, objectives, Define new Strategy – Leadership
SWOT Mission objectives, culture, Structure,
Strategies Corporate,
Grand Strategy Business, HR, Information &
Functional control systems
Scan Internal Environment

Identify Strategic
– Core Competence,
Factors – Strengths,
Synergy, Value Creation
Weaknesses
4 Phases of Strategic Management in a Company
• Basic Financial Planning
-(Meeting annual budgets) • Forecasting-based Planning
-(Incorporating predictions beyond next year)
• Externally Oriented Planning • Strategic Management
-(Thinking strategically, Strategic • -(Considering also the implementation &

Planning) control aspects when formulating strategies)
The Evolution
Some Questions
• How has the strategy field developed?

• How has the thinking in strategy evolved?
• How is the thinking in strategy moving towards?
• What are the questions in strategy that are not answered?
• What are the dilemmas and confusions in the field of strategy
• What have been the loop holes in strategy making?
• What are the potential models of sustainable strategy?
Major Timeline
1950s 1960s-early 70s Mid-70s-mid-80s Late 80s –1990s 2000s
Budgetary Corporate Positioning Competitive Strategic

DOMINANT
THEME planning & planning advantage innovation
control
Financial Planning Selecting Focusing on Reconciling

MAIN
ISSUES
control growth &- sectors/markets. sources of size with
diversification Positioning for competitive flexibility &
leadership advantage agility
Capital Forecasting. Industry analysis Resources & Cooperative

KEY budgeting. Corporate Segmentation capabilities. strategy.
CONCEPTS&
Financial planning. Experience curve Shareholder Complexity.
TOOLS
planning Synergy Portfolio analysis value. Owning
E-commerce. standards.
— Knowledge Management—
Coordination Corporate Diversification. Restructuring. Alliances &

MANAGE-MENT & control by planning depts. Global strategies. Reengineering. networks
IMPLIC- Budgeting created. Rise of Matrix structures Refocusing. Self-organiz
ATIONS systems corporate Outsourcing. ation & virtual
planning organization
Major Thought Schools
Alfred Chandler – Corporate Strategy
John Dunning – IB Strategy
C K Prahalad – Inclusive Strategy
Sumantra Ghoshal – Problems in T.C.E.

Historical development of Strategic Management
Birth of strategic management
originated in the 1950s and 60s
 Alfred D. Chandler, Jr.,

 Philip Selznick,
 Igor Ansoff,
 Peter F. Drucker
Alfred Chandler
 Strategy and Structure

 “structure follows strategy”
Philip Selznick
 Organization's internal factors with external

environmental circumstances
 SWOT analysis
Igor Ansoff
market penetration strategies
product development strategies
market development strategies
horizontal and vertical integration
diversification strategies
Corporate strategy
Peter Drucker
 stressed the importance of objectives
 management by objectives (MBO)

Growth and portfolio theory
 Profit Impact of Marketing Strategies (PIMS)
 effect of market share
 Started at General Electric, moved to Harvard in the early 1970s, and then moved
to the Strategic Planning Institute in the late 1970s, it now contains decades of
information on the relationship between profitability and strategy
 "PIMS provides compelling quantitative evidence as to which business strategies

work and don't work" - Tom Peters.
 The Japanese challenge:
• Higher employee morale, dedication, and loyalty;
• Lower cost structure, including wages;
• Effective government industrial policy;
• Modernization after WWII leading to high capital intensity and productivity;
• Economies of scale associated with increased exporting;
• Relatively low value of the Yen leading to low interest rates and capital costs, low dividend expectations, and
inexpensive exports;
• Superior quality control techniques such as Total Quality Management and other systems introduced by W.
Edwards Deming in the 1950s and 60s.
 McKinsey 7S Framework
Strategy, Structure, Systems, Skills, Staff, Style, and Supra-

ordinate goals
 The Mind of the Strategist was released in America by

Kenichi Ohmae
 Tom Peters -In Search of Excellence

 Gaining competitive advantage
Gary Hamel and C. K. Prahalad
Strategic intent and strategic architecture
 Dave Packard and Bill Hewlett devised an active management style

that they called Management By Walking Around (MBWA).
 Michael Porter
cost minimization strategies, product differentiation strategies, and
market focus strategies
The Military Theorists
• Business War Games by Barrie James, 1984

• Marketing Warfare by Al Ries and Jack Trout, 1986
• Leadership Secrets of Attila the Hun by Wess Roberts , 1987
Philip Kotler was a well-known proponent of marketing warfare strategy
• Offensive marketing warfare strategies

• Defensive marketing warfare strategies
• Flanking marketing warfare strategies
• Guerrilla marketing warfare strategies
Strategic change
In 1968, Peter Drucker (1969) coined the phrase Age of Discontinuity
In 2000, Gary Hamel discussed strategic decay
In 1978, Abell, D. described strategic windows and stressed the

importance of the timing (both entrance and exit) of any given strategy
Clayton Christensen (1997)
1-disruptive technology
2-agnostic marketing (no one knows how in what quantities a
disruptive product will be used before experiencing the product)
Henry Mintzberg (1988) – Strategy was much more fluid and

unpredictable than people had thought
• Strategy as plan - a direction, guide, course of action - intention rather than actual
• Strategy as ploy - a maneuver intended to outwit a competitor
• Strategy as pattern - a consistent pattern of past behaviour - realized rather than

intended
• Strategy as position - locating of brands, products, or companies within the

conceptual framework of consumers or other stakeholders - strategy determined
primarily by factors outside the firm
• Strategy as perspective - strategy determined primarily by a master strategist

Information and technology driven strategy
• Peter Drucker had theorized the rise of the “knowledge worker” back in the 1950s
• In 1990, Peter Senge, who had collaborated with Arie de Geus at Dutch Shell,
borrowed de Geus' notion of the learning organization
• People can continuously expand their capacity to learn and be productive
• New patterns of thinking are nurtured
• Collective aspirations are encouraged, and
• People are encouraged to see the “whole picture” together.

Senge identified five components of a learning organization. They are:
• Personal responsibility
• Self reliance
• Mastery of Mental models
• Team learning -“a spirit of advocacy to a spirit of enquiry”
• Systems thinking
The psychology of strategic management
informal, intuitive, non-routinised, and involving

primarily oral, 2-way communications
“feeling”, “judgement”, “sense”, “proportion”,

“balance”, “appropriateness”.
Criticisms of strategic management
 marketing myopia
 In 2000, Gary Hamel coined the term strategic convergence
 Ram Charan, aligning with a popular marketing tagline, believes that

strategic planning must not dominate action. "Just do it!",
Journals/Magazines devoted primarily to Strategic Management
• Strategic Management Journal

• Harvard Business Review
• Long Range Planning
• The Economist
• MIT Sloan Management Review
• Academy of Management Journal
Corporate Strategy
• Corporate Strategy
• Approach to future that involves
(1) examination of the current and anticipated factors associated with
customers and competitors (external environment) and the firm itself
(internal environment),
(2) envisioning a new or effective role for the firm in a creative manner,
and
(3) aligning policies, practices, and resources to realize that vision.
Industry
Attractiveness Corporate
Strategy
Which Industry
should we be in?
Rate of Return
above the Cost of
Capital
How do we make
money?
Competitive Business
Advantage
Strategy
How Should we
Compete?
Corporate Strategy.
Over all attitude of corporation towards its various
businesses and product lines in terms of Stability growth
& management.
e.g.. Big Bazaars Corporate Strategy of growth diversifying
base in retailing into delivery business.
I. Directional Strategy: CORPORATE STRATEGIES
B. Growth Strategies:
To expand company’s activities
1. Concentration:
Growth potential & concentration of resources on current product lines.
a. Vertical Growth: b. Horizontal Growth:
Expanding in the geographical location & increasing
Taking over Suppliers/Distributors Function
Product & Services in current markets
i. Back Ward Integration: Popular methods to horizontal growth internationally.
Take over supplier’s fn.  Exporting
ii. Forward Integration:  Licensing
Take over Distributor’s fn.  Franchising
 Amount of Vertical Integration  Joint Ventures
 Full Integration  Acquisitions
Internally 100%own key supplies & distribution  Green Field Development
 Taper Integration  Production Sharing
Internally less than 50% own key supplies  Turnkey operations
 Outsourcing  Management contracts
Long term contract for key supplies & distribution  Build, Operate, Transfer (BOT)
I. DIRECTIONAL STRATEGY:
A. Growth Strategies:
2. Diversification:
Less growth potential in current product lines
a. Concentric
 Diversifying in related product or services.the search for synergy, the concept for two
 business can generate more profits together than separately.
 The point may be similar technology, customer usage, distribution, managerial skills, or product similarity .
b. Conglomerate
 Diversifying in unrelated product or services.
 It is concerned primarily with financial considerations of cash flow or risk reduction.
 To transfer its excellent management system into less well managed acquired firm.
B. Stability: Make no changes in company’s activities
1. Pause Strategy:
2. No Change Strategy:
3. Profit Strategy:
C. Retrenchment Strategy:
1. Turn around:
Contraction ‘Stop the Bleeding’ Cut back Size & Cost.
Consolidation: Stream Line the company IBM Computer Service Provider
2. Captive company:
Company becomes another company’s sole Supplier or Distributor.
3. Sell out/ Divestment:

hotmail, Ranbaxy etc.
4. Bankruptcy / Liquidation:
II. Portfolio Strategy
How individual product lines & business units can gain competitive advantage in the marketplace by
using competitive & cooperative Strategies.
III. Parenting Strategy:

Mgt. Coordinates activities & transfers resources & cultivates capability among product lines & business units.
Patterns of Strategy Development
Levels of Strategy
• Arrange the following terms in a logical hierarchy:
– Company
– Division
– Strategic Business Unit (SBU)
– Corporation
– Industry
– Value Chain
– Person
– Department
– Market
• Arrange the following terms in a logical hierarchy:
– Industry – Corporation
– Value Chain – Division / SBU
– Company – Company
– Department
– Person A market refers to the place where
goods and services are exchanged.
Rumelt's Typology of Diversification
1. Single Product: 95% of revenues from a single product line
2. Dominant Product: 70-94% of revenue from a single product line
3. Related Product: Less than 70% of revenue from a single product line and
and the remainder of revenues from a related product domain
4. Unrelated Product: Less than 70% of revenue from a single product and
remainder of revenues from an unrelated product domain
Functional Strategy supports Business Strategy which in turn supports the
Corporate Strategy
CORPORATE STRATEGY:
Overall Direction of Company and Management of Businesses
BUSINESS STRATEGY:
Competitive & Cooperative Strategies
It occurs at Business unit or Product level.
It emphasizes on improvement of competitive position of
Corporations product & services
FUNCTIONAL STRATEGY:
Maximize Resource Productivity
It is concerned with developing & nurturing a distinctive
competence to provide a company or business unit with a
competitive advantage
ORGANIZATIONAL STRUCTURE
&
LEVELS OF STRATEGY
Corporate Corporate
Strategy Head Office
Business
Div-A Div-B Div-C
Strategy
Functional
Prod. HR Fin. Marketing
Strategy
Corporate Level Strategy
• What businesses are we in? What businesses should
we be in?
• Four areas of focus
– Diversification management (acquisitions and
divestitures)
– Synergy between units
– Investment priorities
– Business level strategy approval (but not crafting)
Corporate-Level Strategies
Valuable
strengths Concentric Diversification
Corporate (Economies of
growth Scope)
strategies
Conglomerate Corporate
Firm Diversification stability
Status (Risk Mgt.) strategies
Corporate
retrenchment
strategies
Can still go for business-level growth
Critical (economies of scale)
weaknesses
Abundant Critical
environmental Environmental Status environmental
opportunities threats
Business Level Strategy
• How do we support the corporate strategy?
• How do we compete in a specific business arena?
• Three types of business level strategies:
– Low cost producer
– Differentiator
– Focus
• Four areas of focus
– Generate sustainable competitive advantages
– Develop and nurture (potentially) valuable capabilities
– Respond to environmental changes
– Approval of functional level strategies
Functional / Operational Level Strategy
• An example.
• Functional: How do we
• Business L.S.: Become the low cost
support the business level producer of widgets
strategy? • Functional L.S. (Mfg.): Reduce
manufacturing costs by 10%
• Operational: How do we
• Operational (Plant #1): Increase
support the functional worker productivity by 15%
level strategy?
A Simple Organization Chart
(Single Product Business)
Business Business
Level
Strategy
Research and Human

Manufacturing Marketing Finance
Development Resources
Functional
Level
Strategy
A Simple Organization Chart
(Dominant or Related Product Business)
Corporate Multibusiness
Level Corporation
Business
Level
Business 1 Business 2 Business 3
(Related) (Related) (Related)
Functional
Level
Research and Human
Manufacturing Marketing Finance
Development Resources
An example of an Unrelated Product Business
(Note: By itself, an SBU can be considered a related product business)
SBU: a single business or
collection of related
businesses that is
independent and A Ex.: G.E. (General
formulates its own strategy (Multi-business) Electric Corp.)
Corporation
Strategic Business S.B.U.

Unit 1 2
Company 1 Co. 2 Co. 3 Division 1 Div. 2 Div. 3

Competitive Scope and Value
Chain
How a firm can actually create and
sustain a competitive advantage in its
industry ?
Two Basic Types
• Cost leadership
• Differentiation
Value Chain
• Identify which activities contributing to cost
leadership and differentiation
• Analyze the source of competitive advantage
Value Chain
Firm Infrastructure
Supporting Human Resource Management

Activities
Technology Development
Procurement
Margin
Operations
and Sales
Outbound
Marketing
Logistics
Logistics
Inbound
Service
Primary
Activities
Primary Activities
• Inbound Logistics
Receiving, storing, and disseminating inputs. E.g.,
warehousing, inventory control
• Operations
Transforming inputs into the final product form
Primary Activities
• Outbound Logistics
Collecting, storing and distributing the product to buyers
• Marketing and Sales
Providing a means and incentive which allow buyers to
purchase the product
• Service
Providing service to enhance or maintain the value of the
product
Primary Activity Focus by Industry
Industry Inbound Operations Outbound Marketing & Service
Logistics Logistics Sales
Distributor X X
Restaurant X NA
Corporate X
Lending
Xerox X
Support Activities
• Procurement
Function of purchasing inputs used in the value chain
• Technology Development
Support Activities
• Human Resource Management
• Firm Infrastructure
planning, finance, accounting, legal, etc.
Competitive Scope
• Four scopes may affect value chain
• Ex. The value chain serves minicomputer requires
extensive sales assistance, less hardware performance
– different from what serves small business
Competitive Scope
• Segment Scope
Differences required to serve different product or buyer
segment
• Vertical Scope
Division of activities between a firm and its suppliers,
channels, and buyers
Competitive Scope
• Geographic Scope
Different geographic areas
• Industry Scope
Interrelationships among business units
“Generic” Competitive Advantage
• Cost Leadership
• Differentiation
• Focus
Competitive Strategies
Competitive Advantage
Lower Cost Differentiation
Broad Cost Leadership Differentiation

Competitive Scope
Target
Narrow Cost Focus Differentiation Focus

Target
Cost Leadership Strategy
Steps to achieve cost leadership
• Make cost assignment
• Identify cost drivers
• Understand cost dynamics
• Control cost drivers
• Reconfigure the value chain
Operating Cost Assignment
Firm Infrastructure (9%)

Human Resources Management (2%)
Technology Development(9%)
Procurement (1%)
Margin (5%)
(40%)
Inbound Logistics (3%)
Marketing & Sales (6%)

Purchased Operating Inputs
Human Resource Costs
Service (1%)
(27%)
Operations (67%) Outbound

Logistics (1%)
Asset Assignment
Human Resources Firm Infrastructure (16%)
Management (1%)
Technology Development(2%)
Procurement (2%)
(8%)
Liquid Assets (6%) (15%)
Service (2%)
Fixed Assets
(38%)
(2%) (5%)
Inbound Logistics Operations (67%) Outbound

Logistics (1%)
Marketing & Sales (1%)

Why cost assignment
• Understand the firm’s cost structure
• Find cost drivers of each cost segment
• Match cost structure to buyer’s value chain
• Configure and reconfigure the cost structure
Cost Leadership – Cost Drivers
Factors affect costs.
• Economies or diseconomies of scale
• Learning and spillover
• Pattern of capacity utilization
– When fixed cost high, capacity utilization is important
• Linkages
How other activities are performed
– Linkages within the Value Chain
– Vertical Linkages
• Interrelationships
With other business units within a firm
• Integration
Vertical integration in a value activity
• Timing
• Discretionary policies
Policies that reflect a firm’s strategy
• Location
• Institutional factors
e.g., government regulations, financial incentives,
unionization, etc.
Identify Cost Drivers
Cost Dynamics
• What cause the change of cost drivers
Cost Dynamics
• Industry real growth
• Differential scale sensitivity
• Different learning rates
• Differential technological change
• Relative inflation of costs
• Aging
• Market adjustment
How to Achieve Cost Advantage
Cost Position
composition of a
Reconfigure the
firm’s value
value chain
chain versus
competitors’
achieve Cost Advantage
a firm’s relative
position vis-à-vis
the cost drivers Control cost
drivers
of each activity
Analyze Cost Advantage
Firm Infrastructure
Human Resource Management
Technology Development
Margin
Procurement
Your cost
Advantage
Logistics
Inbound
Operations
Service
and Sales
Outbound
Marketing
Logistics
Control Cost Drivers
• E.g., control scale – gain the appropriate firm size
Reconfigure the Value Chain
• Reconfiguration of the value chain presents the opportunity to
fundamentally restructure a firm’s cost, compared to settling for
incremental improvements.
• By altering the basis of competition in a way that favors a firm’s
strengths, it may change the important cost drivers in a way that
favors a firm.
Steps in Strategic Cost Analysis
1. Identify the appropriate value chain and assign costs and assets
to it.
2. Diagnose the cost drivers of each value activity and how they
interact.
3. Identify competitor value chains, and determine the relative cost
of competitors and the sources of cost differences.
4. Develop a strategy to lower relative cost position through
controlling cost drivers or reconfiguring the value chain and/or
downstream value.
Cost Focus
A firm dedicates its efforts to a well-chosen segment
of an industry can often lower its costs significantly.
Differentiation
• Emphasize on a unique source of differentiation in the
Value Chain, rather than on products or markets only
• Differentiation base on buyers’ value, not only
difference that buyers do not value
• Should consider the cost of differentiation
Uniqueness Differentiation Buyers’ Value
Identify Sources of Differentiation
Margin
Your strength which can
lead to differentiation and
then improve buyers’ value
Drivers of Uniqueness
• Policy Choices
• Linkages
– Linkages within the value chain
– Supplier linkages
– Channel linkages
• Timing
Be the first
• Location
Drivers of Uniqueness
• Interrelationship
Sharing a value activity with sister business units. E.g., sharing a sales force for
both insurance and other financial products
• Proprietary learning
• Integration – e.g., integrating online systems to current ordering
systems
• Scale
• Institutional factors – e.g., “Madame’s route”
Why buyers purchase?
Purchasing Criteria
• User criteria – firms to meet them by lowering cost
or raising buyer performance
• Signaling criteria – telling buyers what benefits to
get
Differentiation for creating Buyer Value
by
• Lowering buyer cost
• Raising buyer performance
• Signaling the value
Through
• Linking the firm’s value chain to the buyer’s value
chain
Steps in Differentiation
1. Determine who the real buyer is
2. Identify the buyer’s value chain and the firm’s
impact on it
3. Determine ranked buyer purchasing criteria
4. Assess the existing and potential sources of
uniqueness in a firm’s value chain
Steps in Differentiation
5. Identify the cost of existing and potential sources of
differentiation
6. Choose the configuration of value activities that
creates the most valuable differentiation for the
buyer relative to cost of differentiating
7. Test the chosen differentiation strategy for
sustainability
8. Reduce cost in activities that do not affect the
chosen forms of differentiation
Cost-leadership Strategy
• Do everything to achieve a CA through producing products or services at a lower unit cost

(lowering cost structure)  charge a lower price.
• Increase efficiency and lower costs – the manufacturing and materials management functions
are the center of attention
• A low-level of product differentiation – it means that you do not want to be the industry
leader in differentiation.
• Target the average customer – Scale and Focus, not Product Variety
- ignores the different market segments – focuses on mass market.
Advantages and Disadvantages of
Cost-leadership Strategy
• Advantages • Disadvantages
- charge a lower price yet - technological advancement
make the same level of profit. makes the low cost
- win in the price war. advantage outdated.
- low-cost as an entry barrier. - imitation ability of
- protected from rivals. competitors.
- less affected by powerful - lose sight of changes in
buyers and suppliers. customers’ tastes
- room to reduce its price to
compete with substitute
products.
Differentiation Strategy
• Do everything to achieve a CA through producing products or services that are

unique to customers  charge a premium price.
• Achieved in 3 principal ways – quality, innovation, & responsiveness to customers
• Try to differentiate along as many dimensions as possible – the bases of

differentiation are endless (prestige, status,…)
• R&D, Sales, & Marketing functions are center of attention.
• Serve many market segments (i.e., a broad differentiator)

Differentiation Strategy
- Premium price. - Substitutes can be a possible
threat.
- Protected from rivals. (i.e., brand
loyalty, customer loyalty..)
- Difficult to maintain a product’s
- Brand loyalty as an entry barrier. uniqueness in customers’ eyes for
a long time.
- Less affected by powerful buyers
and suppliers.
Focus Strategy
• Try to achieve a CA by serving the needs of a specific market segment or niche (i.e.
geographically, product line, customer type,..).
• Pursue a focus strategy through either a low-cost approach or a differentiation

- focused cost-leadership
- focused differentiation (i.e., a specialized differentiator)
• Try to build market share in one or a few market segments and, if successful, then begin
to serve more segments.
• Pursue any distinctive competency

Focused Strategy
- Exploration of a gap in the - Cost disadvantage relative to low-
market  customer loyalty. cost leader b/c of a small volume.
- Stay close to its customers and - Susceptible to attack from a broad

respond to their changing needs. differentiator.
(faster in innovations).
- Technological change or changes
- In general, a focused firm is in customers’ tastes can make a
O.K. against the threats of five niche market disappear.
forces.
Other Discussion
• Creative Industries
• Supply Chain Management
• What is “Buyer’s Value Chain”?
Module-II (Strategic Analysis)
Module Outcome
• Understanding the hierarchical structure of Strategic Intent
• Describe the forces in the macro environment organization using ETOP
and PESTLE framework
• Understanding advantages and disadvantages to a firm through SAP
• Develop Scenarios and explain their implications
• Use Five forces framework to identify the sources of competition for a
SBU
• Define strategic groups, market segments and CSFs and explain how
these concepts help in understanding competition
• Explain the different type of strategic gap that might present
opportunities or threats to organizations
• Understanding SWOT Analysis
Module Content
• Mission
• Vision
• Business Definition
• Environmental Threat and Opportunity Profile (ETOP)
• Industry Analysis
• Strategic Advantage Profile (SAP)
• Competitor Analysis
• Market Analysis
• Environmental Analysis and Dealing with Uncertainty
• Scenario Analysis
• SWOT Analysis
Vision, Mission and Business Definition
Whether you are starting a new company or improving an

existing one, you should define its purpose for existence. Then
it is important to have a mission, plans and a vision for your
company or business enterprise.
Questions you may have include:
• What factors are in the purpose of a business?
• How do you define a mission?
• What about a business concept?
Vision/Mission Statements
• Statements that explain who we are
– Type of organization
– Products/services
– Needs we fill
• Statements that explain our direction, our purpose, our reason for
being
– What difference do we make?
• Statements that explain what makes us unique
– Values
– People
– Combination of products and services
Major Components of the
Strategic Plan / Down to Action
Strategic Plan
Action Plans
Mission Why we exist
Evaluate Progress
Vision What we want to be

Goals What we must achieve to be successful
Objectives O1 Specific outcomes expressed in
O2
measurable terms (NOT activities)
Initiatives Planned Actions to
AI1 AI2 AI3 Achieve Objectives
Measures Indicators and

M1 M2 M3
Monitors of success
Targets T1 T1 T1 Desired level of
performance and
timelines
VISION : Desired future state; the
aspiration of the Organization
 What are our Dreams and Aspirations?
Where do we want to go?
 What do we want to look like in 5, 10, 15
years?
• How the organization wants to be perceived in the
future – what success looks like
• An expression of the desired end state
• Challenges everyone to reach for something significant
– inspires a compelling future
• Provides a long-term focus for the entire
organization
• A guiding philosophy
• Consistent with organizational value
• Influenced by the strengths and weaknesses of the
business
Components of a Vision Statement
• Core ideology
– Core Values - timeless guiding principles
– Core Purpose - reason for being
• Envisioned future
– Big Hairy Audacious Goals (BHAG) - clearly articulated goals
– Vivid description - a graphic description of what success and the future will be like
• Recognition of service to stakeholders
– Owners/creditors
– Employees
– Customers
Essentials of good Business Vision Statement
• A statement that clearly defines the firm’s “reason” for

being in business
– Should significantly stretch the resources and capabilities of
the farm
– Should inspire people in the organization to achieve things
they never thought possible
– Should unite people in the organization toward the pursuit of
one common goal
• Equal • Informative
• Adept • Solid
• Aggressive • Disciplined • Innovative
• Solvent
• Agile
• Effective • Leading
• Aligned • Stable
Assertive
• Efficient • Logical
• • State of the Art
• Available • Enduring • Major
Best-in-class
• Strong
•
• Expanding • Nimble
• Challenging • Streamlined
• Clear • Expert • Pioneering
• Sufficient
• Competent • Fast • Protected
• Complex • Strategic
• Fast-paced
• Compliant • Organized
• Sustainable
Conservative • Financially-sound
• • Over-Arching
• Timely
• Coordinated • Focused
• Quick
• Critical
• Growth • Value-added
• Direct • Ready
• Healthy • Vigilant
• Responsive
• Improving • Visionary
• Savvy
• Incentivized • World-class
• Simple
• Increasing
VISION STATEMENTS
• McDonald’s
• To give each customer, every time, an experience that sets new
standards in value, service, friendliness, and quality.
• NASDAQ
• To build the world’s first truly global securities market . . . A
worldwide market of markets built on a worldwide network of
networks . . . linking pools of liquidity and connecting
investors from all over the world . . . assuring the best possible
price for securities at the lowest possible cost.
132
• Petsmart
• To be the premier organization in nurturing and
enriching the bond between people and animals.
• Wachovia
• Wachovia’s vision is to be the best, most trusted
and admired financial services company.
133
MISSION :It is the unique purpose or reason for
organization’s existence.
Overriding purpose in line with the values or
expectations of
the stakeholders
 Who are we?

 What business are we in?
eBay
We help people trade anything on earth.
We will continue to enhance the online
trading experiences of all – collectors,
dealers, small businesses, unique item
seekers, bargain hunters, opportunity
sellers, and browsers.”
• The mission statement of an organization is normally
short, to the point, and contains the following elements:
– Provides a concise statement of why the organization exists, and
what it is to achieve;
– States the purpose and identity of the organization;
– Defines the institution's values and philosophy; and
– Describes how the organization will serve those affected by its
work.
Good Mission Statements
Focus on limited number of goals
Stress major policies and values
Define major competitive spheres within which the company will
operate by defining the:
Industry.
Products and applications.
Competence.
Market-segment
Geographical
Vertical limit
Examples – Good and Bad
Mission Statements
NASA
To Explore the
Universe and
Search for Life and Does a good job of expressing
to Inspire the Next the core values of the
Generation of organization. Also conveys
Explorers
unique qualities about the
organization.
Walt Disney
To Make People
Too vague and and unclear.
Happy Need more descriptive
information about what makes
the organization special.
• MISSION STATEMENTS
• Bristol-Myers Squibb
• Our mission is to extend and enhance human life by
providing the highest-quality pharmaceuticals and health
care products.
• GlaxoSmithKline
• GSK’s mission is to improve the quality of human life by
enabling people to do more, feel better and live longer.
139
• Merck
• The mission of Merck is to provide society with superior
products and services by developing innovations and solutions
that improve the quality of life and satisfy customer needs, and to
provide employees with meaningful work and advancement
opportunities, and investors with a superior rate of return.
• Wipro
• The mission is to be a full-service, global outsourcing company.
140
Products
Services Markets
Customers
Technology
Employees
Mission
Elements
Survival
Growth
Profit
Public
Image
Self-Concept Philosophy
Importance of Mission
Benefits from a strong mission
Unanimity of Purpose
Resource Allocation
Mission
Organizational Climate
Focal point for work

structure
Mission Statement Evaluation Matrix
Organization Name Customers Products Markets Concern for Technology
Services Survival, Growth,
Profitability
Organization 1
Organization 2
Mission Statement Evaluation Matrix
Organization Name Philosophy Self-Concept Concern for Public Concern for Employees
Image
Organization 1
Organization 2
Vision vs. Mission
• The vision is more broad and future oriented

– the goal on the horizon
• The mission is more focused – how you will
get to the horizon
GOAL: General statement of Aim or Purpose.
It is an open ended statement of what one wishes
to accomplish with no quantification and no
time frame for completion.
• Describes a future end-state – desired outcome
that is supportive of the mission and vision.
• Shapes the way ahead in actionable terms.
• Best applied where there are clear choices about
the future.
• Puts strategic focus into the organization –
specific ownership of the goal should be
assigned to someone within the organization.
• May not work well where things are changing fast
– goals tend to be long-term for environments that
have limited choices about the future.
Developing Goals
• Cascade from the top of the Strategic Plan –
Mission, Vision, Guiding Principles.
• Look at your strategic analysis – SWOT,
Environmental Scan, Past Performance, Gaps . .
• Limit to a critical few – such as five to eight goals.
• Broad participation in the development of goals:
Consensus from above – buy-in at the execution
level.
• Should drive higher levels of performance and
close a critical performance gap.
Reorganize
Reorganizethe
theentire
entireorganization
organizationfor
forbetter
betterresponsiveness
responsivenessto
tocustomers
customers
We
Wewill
willpartner
partnerwith
withother
otherbusinesses,
businesses,industry
industryleaders,
leaders,and
andgovernment
government agencies
agenciesin
inorder
orderto
to
better
bettermeet
meetthe
theneeds
needsof
ofstakeholders
stakeholdersacross
acrossthe
theentire
entirevalue
valuestream.
stream.
Manage
Manageour
ourresources
resourceswith
withfiscal
fiscalresponsibility
responsibilityand
andefficiency
efficiencythrough
throughaasingle
singlecomprehensive
comprehensive
process
processthat
thatis
isaligned
alignedto
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ourstrategic
strategicplan.
plan.
Improve
Improvethe
thequality
qualityand
andaccuracy
accuracyof
ofservice
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informationprovided
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toour
ourinternal
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customers.
customers.
Establish
Establishaameans
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Maintain
Maintainand
andenhance
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facilities.
OBJECTIVE : Quantification or more precise statement of objective
 Definable: It should defined to compare the performance
 Quantifiable: It should be expressed in terms of “Value Or Market share”
( Avoid Vague terms such as “increase, improve or maximize”)
 Achievable:
e.g.
 To increase sales of product globally by 30% in real terms within 5yrs.
 To increase market share for the product in the India from 10%-15% over 2yrs
• Relevant - directly supports the goal
• Compels the organization into action
• Specific enough so we can quantify and measure the
results
• Simple and easy to understand
• Realistic and attainable
• Conveys responsibility and ownership
• Acceptable to those who must execute
• May need several objectives to meet a goal
GOALS OBJECTIVES
Very short statement, few Longer statement, more

words descriptive
Broad in scope Narrow in scope
Directly relates to the Indirectly relates to the Mission

Mission Statement Statement
Covers long time period Covers short time period (such 1

(such as 10 years) year budget cycle)
GOAL OBJECTIVE STRATEGY
Increase i) Increase product

To be
market promotion
No. 1
share by ii) Design product pricing
in the
15% in
market iii) Penetration
three years
iv) New market
development
v) Product-Service mix
vi) Quality improvement
Business Definition
• A Business Definition is a clear statement of the business
the firm is engaged in or is planning to enter.
What is our Business in precise way:
• “We are in the beauty enriching Business” (Helen
and Curtis)
• “ We are in the Business of Computing Technology”
(Intel)
• “We are Watch makers of the nation” (HMT)
• “We are in the transportation business” (TELCO)
Business Definition
Abell’s Framework
http://www.12manage.com/methods_abell_three_dimensional_business_definition.html
• Business Definition Statements
• Define the ‘space’ that the business wants to create for
itself in competitive terrain
• Broadly specifies the opportunities that the business may
exploit within the space and the threats it may encounter
from rival firms in course of time
• Must be defined in broad ways, keeping changing customer
tastes and aspirations in mind
Product Oriented V/S market Oriented
Company Product Definition Market Definition
Railways We run railways We are a people and Goods

mover
Oil Company We Sell Gasoline We supply energy
Film Producing Company We make movies We make entertainment
Air conditioning company We make air conditioners We provide climate control in

the home
Publishing Company We produce and sell books We distribute information
Copying Company We make copying equipments We help improve office

productivity
• Questions to be examined before defining nature
and scope of operations
1) Who is the customer? Where is the customer
located, how to reach the customer, how does the
customer buy etc.
2) What does the customer buy?
3) What does the customer consider value?
CORE : Resources, Processes, Skills
COMPETENCE and Experience, which
provide superior
STRATEGY : Long Term Direction
STRATEGIC : Combination of Resources,
ARCHITECTURE Processes and Competencies
to put strategy in action
CONTROL : Monitoring of Action Steps
to :
(a) Assess effectiveness of
Strategies & Action
(b) Modify Strategies &

Action as necessary
VALUES
 What do we prize?
 What drives our business?
 What are our criteria for making ethical
decisions?
Guiding Principles and Values
• Every organization should be guided by a set of
values and beliefs
• Provides an underlying framework for making
decisions – part of the organization’s culture
• Values are often rooted in ethical themes, such as
honesty, trust, integrity, respect, fairness, . . . .
• Values should be applicable across the entire
organization
• Values may be appropriate for certain best
management practices – best in terms of quality,
exceptional customer service, etc.
Examples of
Guiding Principles and Values
We
Weobey
obeythe
thelaw
lawand
anddo
donot
notcompromise
compromisemoral
moralor
orethical
ethicalprinciples
principles––ever!
ever!
We
Weexpect
expectto
tobe
bemeasured
measuredby bywhat
whatwe
wedo,
do,as
aswell
wellas
aswhat
whatwewesay.
say.
We
Wetreat
treateveryone
everyonewith
withrespect
respectand
andappreciate
appreciateindividual
individualdifferences.
differences.
We
Wecarefully
carefullyconsider
considerthe
theimpact
impactof
ofbusiness
businessdecisions
decisionson
onour
ourpeople
peopleand
andwe
we
recognize
recognizeexceptional
exceptionalcontributions.
contributions.
We
Weare
arestrategically
strategicallyentrepreneurial
entrepreneurialin inthe
thepursuit
pursuitof
ofexcellence,
excellence,encouraging
encouragingoriginal
originalthought
thought
and
andits
itsapplication,
application,and
andwilling
willingto
totake
takerisks
risksbased
basedon
onsound
soundbusiness
businessjudgment.
judgment.
We
Weare
arecommitted
committedtotoforging
forgingpublic
publicand
andprivate
privatepartnerships
partnershipsthat
thatcombine
combinediverse
diversestrengths,
strengths,
skills
skillsand
andresources.
resources.
MARKETS
 Which markets should we be in?
 Which markets do we need to create?
 What should be our basic Customer
Orientation?
CORE COMPETENCIES
 What are we good at?
 What do we need to be good at?
 How can we leverage our competencies into
products and services for market we serve?
PRODUCTS & SERVICES
 What kinds of products and services should
we provide for the markets we serve?
 How do we use these products to carve out a

market niche?
BUSINESS ENVIRONMENT
 What Threats and Opportunities do we face
from Environmental Factors?
 How do we track Key Environmental
Activities and Trends?
STAKEHOLDERS
 Which group of individuals are affected by
the way we do business?
 How do we establish win-win relationship
with our stakeholders?
Stakeholders
• individuals and groups who have an interest in a firm’s
performance and an ability to influence its actions
• Interest in performance coupled with ability to influence

the firm through their decision to support the firm or not –
companies have important relationships with their
stakeholders.
170
171
Strategic Leaders
• Individuals who practice strategic leadership –
making sure that decisions are made that will ensure
their firm’s success.
– Example: Steve Jobs & Apple
– The CEO
– The Board of Directors
– Both are responsible for setting the organizational culture.
172
Strategic Leaders
though many different people may be involved, the final responsibility
for effective use of the strategic management process rests with the
firm’s top-level strategic leaders (i.e., the chief executive officer
and the top management team). In addition, it is important to note
that the best strategic leaders as well as all others throughout the
firm also act ethically.
173
CRITICAL RESOURCES
 Which are the Critical Resources do we need
to do business?
 What should we do to ensure a steady
supply of these Resources?
ENVIRONMENTAL
THREAT
AND
OPPORTUNITY PROFILE
ETOP ANALYSIS
PEST ANALYSIS SWOT ANALYSIS

WHY ETOP??
o Helps organization to identify O-T
To consolidate and strengthen organization’s position

o
o Provides the strategists of which sectors have a favourable impact on the organization.
o Organization knows where its stands with respect to its environment.
o Helps in formulating appropriate strategy

ETOP ANALYSIS
Economic factors: Technological factors:

• General economic condition. • Source of technology.
• Rate of inflation.
• Technological development.
• Interest rate/Exchange rate.
• Impact of technology.
ETOP ANALYSIS
Environmental factors:
Socio cultural factors :
o Demographic characteristics. o Weather change
o Social attitudes. o Climatic change.
o Education level , awareness, and o Demand related factors.

consciousness of rights.
o Suppliers related factors.
ETOP ANALYSIS
Political factors : Legal factors :
o Political system. o Policies related to licensing ,

monopolies.
o Political structure , its goals and
stability. o Policies related to export and import.
o Government policies , degree of o Policies related to distribution and

intervention pricing.
FACTORS COULD INCLUDE
Political international trade, taxation policy
Economic interest rates, exchange rates, national income,

inflation, unemployment, Stock Market
Social ageing population, attitudes to work, income

distribution
Technological innovation, new product development, rate of

technological obsolescence
Environmental global warming, environmental issues

Legal competition law, health and safety, employment
law
THREAT MATRIX
ate
HIGH d er ats
or s o
j
a t M hre
M ea T
h r
T
ATTRACTIVENESS
o r
ate i n ts
e r s M ea
LOW t r
od rea Th
M h
T
HIGH LOW
PROBABILITY OF OCCURENCE
OPPURINITY MATRIX
e ly
rat ive
HIGH e t
e ry ive od trac
V a ct M t
A
ttr
a
ATTRACTIVENESS
e ly ss ive
r at ive e
L ct
LOW d e ct t ra
o a
M ttr At
A
HIGH LOW
PROBABILITY OF OCCURENCE
PREPARING ETOP
o Dividing the environment in different
sector.
o Analyzing the impact of each sector on the

organization.
o Subdividing each environmental sector

into sub factor.
o Impact of each sub sector on organization

in form of a statement.
ETOP: Pros and Cons
Pros Cons
o Help to determine the key factor of o It doesn’t show the interaction between the
threats and opportunities. factors.
o Good tool to qualify the factors related to o It can’t reflect the dynamic environment.
company’s strategy.
o It’s a subjective analysis tool.
o Can consider many factors for each special
case.
Industry
Industry Analysis:
Analysis: The
The Fundamentals
Fundamentals
• The objectives of industry analysis

• From environmental analysis to industry analysis
• Porter’s Five Forces Framework
• Applying industry analysis
• Industry & market boundaries
• Identifying Key Success Factors
Objectives of Industry Analysis
• To understand how industry structure drives competition, which
determines the level of industry profitability.
• To assess industry attractiveness
• To use evidence on changes in industry structure to forecast future
profitability
• To formulate strategies to change industry structure to improve industry
profitability
• To identify Key Success Factors
From
From Environmental
EnvironmentalAnalysis
Analysis
to
to Industry
IndustryAnalysis
Analysis
The national/ The natural

international environment
economy
THE INDUSTRY
ENVIRONMENT
Demographic
Technology structure
• Suppliers
• Competitors
• Customers
Government Social structure
Social structure
& Politics
•The Industry Environment lies at the core of the Macro Environment.

•The Macro Environment impacts the firm through its effect on the Industry
Environment.
Profitability
Profitability of
of US
US Industries
Industries
Median return on equity (%), 1999-2002
Pharmaceuticals 26.8 Gas & Electric Utilities 10.5
Tobacco 22.0 Food and Drug Stores 10.3
Household & Personal Products 20.5 Motor Vehicles & Parts 9.8
Food Consumer Products 20.3 Home Equipment 9.5
Medical Products & Equipment 18.8 Railroads 9.0
Beverages 18.8 Hotels, Casinos, Resorts 8.0
Scientific & Photographic Equipt. 16.5 Insurance: Life and Health 7.6
Commercial Banks 16.0 Building Materials, Glass 7.0
Publishing, Printing 14.3 Metals 6.0
Petroleum Refining 14.3 Semiconductors &
Apparel 14. 3 Electronic Components 5.8
Computer Software 13.5 Insurance: Property & Casualty 5.3
Electronics, Electrical Equipment 13.3 Food Production 5.3
Furniture 13.3 Telecommunications 3.5
Chemicals 12.8 Forest and Paper Products 3.5
Computers, Office Equipment 11.8 Communications Equipment (4.0)
Health Care 11.5 Airlines (34.8)
The
The Determinants
Determinants of
of Industry
Industry Profitability
Profitability
3 key influences:
• The value of the product to customers
• The intensity of competition
• Relative bargaining power at different levels within the

value chain.
The
The Spectrum
Spectrum of
of Industry
Industry Structures
Structures
Perfect
Oligopoly Duopoly Monopoly
Competition
Concentration Many firms A few firms Two firms One firm
Entry and Exit No barriers Significant barriers High barriers

Barriers
Product Homogeneous
Differentiation Potential for product differentiation
Product
Perfect
Information Imperfect availability of information
Information flow
Porter’s
Porter’s Five
Five Forces
Forces of
of Competition
Competition
Framework
Framework
SUPPLIERS
Bargaining power of suppliers
INDUSTRY
COMPETITORS
POTENTIAL Threat of Threat of

SUBSTITUTES
ENTRANTS
new entrants Rivalry among substitutes
existing firms
Bargaining power of buyers
BUYERS
The
The Structural
Structural Determinants
Determinants of
of Competition
Competition
BUYER POWER
• Buyers’ price sensitivity
• Relative bargaining
power
THREAT OF ENTRY INDUSTRY RIVALRY SUBSTITUTE

•Capital requirements •Concentration COMPETITION
•Economies of scale •Diversity of
• Buyers’ propensity
•Absolute cost advantage competitors
to substitute
•Product differentiation •Product differentiation
• Relative prices &
•Access to distribution •Excess capacity &
exit barriers performance of
channels
substitutes
•Legal/ regulatory barriers •Cost conditions
•Retaliation
BUYER POWER
• Buyers’ price sensitivity
• Relative bargaining
power
Threat
Threat of
of Substitutes
Substitutes
Extent of competitive pressure from producers of
substitutes depends upon:
• Buyers’ propensity to substitute
• The price-performance characteristics of substitutes.

The
The Threat
Threat of
of Entry
Entry
Entrants’ threat to industry profitability depends upon the
height of barriers to entry. The principal sources of barriers to
entry are:
• Capital requirements
• Economies of scale
• Absolute cost advantage
• Product differentiation
• Access to channels of distribution
• Legal and regulatory barriers
• Retaliation
Bargaining
Bargaining Power
Power of
of Buyers
Buyers
Buyer’s price sensitivity Relative bargaining power

• Cost of purchases as %
• Size and concentration of
of buyer’s total costs.
• How differentiated is the buyers relative to
purchased item? sellers.
• How intense is • Buyer’s information .
competition between • Ability to backward
buyers? integrate.
• How important is the
Note: analysis of supplier
item to quality of the power is symmetric
buyers’ own output?
Rivalry
Rivalry Between
Between Established
Established Competitors
Competitors
The extent to which industry profitability is depressed by aggressive price
competition depends upon:
• Concentration (number and size distribution of firms)

• Diversity of competitors (differences in goals, cost structure, etc.)
• Product differentiation
• Excess capacity and exit barriers
• Cost conditions
– Extent of scale economies
– Ratio of fixed to variable costs
Profitability
Profitability and
and Market
Market Growth
Growth
ROI (%)
30
25
20
15
10
0
Returnonsales Returnoninvestment Cashflow/Investment
-5
<-5% -5%to0 0to5% 5%to10% >10%
Return on sales Return on investment Cash flow/ Investment
Less than -5% -5% to 0 0 to 5% 5% to 10% Over 10%

ANNUAL RATE OF GROWTH OF MARKET DEMAND
The
The Impact
Impact of
of Unionization
Unionization on
on Profitability
Profitability
Percentage of employees unionized

None 1%-35% 35%-60% 60-75% >75%
ROI (%) 25 24 23 18 19
ROS (%) 10.8 9.0 9.0 7.9 7.9
ROI = Return on Investment

ROS = Return on Sales
Applying
Applying Five
Five -- Forces
Forces Analysis
Analysis
Forecasting Industry Profitability

• Past profitability a poor indicator of future profitability.
• If we can forecast changes in industry structure we can
predict likely impact on competition and profitability.
Strategies to Improve Industry Profitability

• What structural variables are depressing profitability
• Which can be changed by individual or collective
strategies?
Drawing
Drawing Industry
Industry Boundaries
Boundaries :: Identifying
Identifying the
the Relevant
Relevant
Market
Market
• What industry is BMW in:
– World Auto industry
– European Auto industry
– World luxury car industry?
• Key criterion: SUBSTITUTABILITY

– On the demand side : are buyers willing to substitute between types of cars and
across countries
– On the supply side : are manufacturers able to switch production between types of
cars and across countries
• May need to analyze industry at different levels for different types of

decision
Identifying
Identifying Key
Key Success
Success Factors
Factors
Pre-requisites for success

Pre-requisites for success
What do customers How does the firm survive

want? competition
Analysis of competition
Analysis of demand
• What drives competition?
• Who are our • What
What are
drives competition? dimensions
the main
customers? • What
of are the main
competition?
dimensions of competition?
• What do they want? ••How
Howintense
intenseisiscompetition?
competition?
••How
Howcan
canweweobtain
obtainaasuperior
superior competitive
competitive position? position?
KEY SUCCESS FACTORS

Identifying
Identifying Key
Key Success
Success Factors
Factors Through
Through
Modeling
Modeling Profitability:
Profitability: The
The Airline
Airline Industry
Industry
Profitability = Yield x Load factor - Unit Cost
Income
ASMs
= Revenue
RPMs ASMs
x
RPMs
- Expenses
ASMs
• Strength of • Price • Wage rates.
competition on routes. competitiveness. • Fuel
• Responsiveness to cha- • Efficiency of route efficiency of
anging market conditions planning. planes.
• Flexibility and • Employee
• % business travelers. responsiveness. productivity.
• Achieving differentiation • Customer loyalty. • Load factors.
advantage • Meeting customer • Administrative
requirements. overhead.
ASM = Available Seat Miles RPM = Revenue Passenger Miles

Identifying
Identifying Key
Key Success
Success Factors
Factors
by
by Analyzing
Analyzing Profit
Profit Drivers:
Drivers: Retailing
Retailing
Sales mix of products
Avoiding markdowns through

Return on Sales
tight inventory control
Max. buying power to minimize

cost of goods purchased
ROCE
Max. sales/sq. foot through:
*location *product mix
*customer service *quality control
Sales/Capital Max. inventory turnover through
Employed electronic data interchange, close
vendor relationships, fast delivery
Minimize capital deployment
through outsourcing & leasing
SUMMARY:
SUMMARY: What
What Have
Have We
We Learned?
Learned?
Forecasting Industry Profitability
• Past profitability a poor indicator of future profitability.
• If we can forecast changes in industry structure we can predict likely impact on competition and
profitability.
Strategies to Improve Industry Profitability

• What structural variables are depressing profitability?
• Which can be changed by individual or collective strategies?
Defining Industry Boundaries

• Key criterion: substitution
• The need to analyze market competition at different levels of aggregation
(depending on the issues being considered)
Key Success Factors

• Starting point for the analysis of competitive advantage
Strategic Advantage Profile
(SAP)
OCP
VRIO FRAMEWORK
• Resource-asset, competency, skill,knowledge

e.g. patents, brand name,
• Value: Does it provide competitive advantage?
• Rarity: Do other competitors possess it?
• Imitability: Is it costly for others to imitate?
• Organisation: Is the firm organised to exploit the resource?
VRIO Steps
• Identify firms resources-S&W
• Combine firms strength into specific capabilities
• Appraise-profit potential, sustainable competitive advantage, ability to
convert it to a profitable proposition
• Select strategy -firm’s resources& capability relative to external
opportunity
• Identify resource gaps and invest in upgrading weaknesses
Strategic Advantage Profile (SAP) - Steps
1) The organization should identify the factors which are relevant for determining
success in the industry concerned.
2) At the next level, the organization should measure its performance on these
factors in comparison to its competitors. Based on the comparison, the
organization can find out whether it has advantage or disadvantage in terms of
various factors. An advantage is the situation which helps the organization to
do better than its competitors. A disadvantage is the situation which affects the
competitive position of the organization adversely. Further,
advantages/disadvantages should be measured in terms of degree because all
advantages/disadvantages may not be equal.
3) After identifying advantages, the next step is to measure their sustainability
because any advantage may turn into disadvantage due to change in
environmental factors. For example, many companies had competitive
advantage in pre-liberalized era which turned into disadvantage because of
entry of new competitors in post-liberalized era.
Strategic Advantage Profile (SAP)
SAP is a summary statement, which provides an overview of the advantages and disadvantages in key area
likely to affect future operations of the firm. It is a tool for making a systematic evaluation of the
strategic advantage factors, which are significant for the company in its environment. The following is
an example of the SAP analysis of a hypothetical company
Capability Factor Competitive strengths / Weakness

•Finance High cost of capital, reserves & surplus
•Marketing Fierce competition, company position secure
•Operational Excellent -parts & components available
•Personnel Quality of management & personnel par with competition
•General High Quality experienced top management -take proactive stance
Competitor Analysis
Concerns of an Org.’s competitive analysis
1. Who are our competitors?

2. How can our competitors be grouped meaningfully?
3. What are our competitors’ strengths and weaknesses?
4. What are our competitors’ objectives and strategies?
5. How are our competitors likely to react to changes in the
marketing environment?
Concerns of an Org.’s competitive analysis (1)
Competitor identification
1. Who are our competitors?
Similar specific-same product, technology and target market
Similar general-same product area, but different segments
e.g. Haagen daze vs. Wall’s
Different specific-same need satisfied by different means
e.g. Eurostar vs. British airway
Different general-competing for discretionary spend
e.g. holiday vs. new car
2. How can our competitors be grouped meaningfully?
Different characteristics for identifying Strategic groupings
Source: Adapted from Wilson et al. (1992).

3. What are competitive strengths and weaknesses
• Requires use of various information sources.

• Consider in terms of critical success factors:
e.g. manufacturing, technical and financial strength,
relationships with supplier and customer, its market and
segment, product range, its volume, cash and profits etc.
• Information can be used to plan and launch attack.
4. What are our competitors’ objectives and strategies?
Objectives – related to cash generation, market share,

technological leadership, quality recognition
etc.
Find clues in product portfolio.
Strategy - related to its positioning, marketing mix etc.
5. How are our competitors likely to react to changes in the

marketing environment?
Learn by experience
Not easy to predict its reaction due to: its cost structures,
relative market positions, product life cycle, industrial
position etc.
Useful information about competitors
Source: Wilson et al. (1992).

Competitor Analysis
Future Objectives What drives the competitor?

How do our goals compare to
our competitors’ goals?
Where will emphasis be
placed in the future?
What is the attitude toward
risk?
Competitor Analysis
Future Objectives What is the competitor doing?
How do our goals compare What can the competitor do?
to our competitors’ goals?
Current
Where will emphasis Strategy
be
placed in How
the future?
are they currently
competing?
risk?
Does this strategy support
changes in the competitive
structure?
Competitor Analysis
Future Objectives What does the competitor believe
How do our goals compare to about itself and the industry?
Where willCurrent
emphasis Strategy
be
placed in How
the future?
are we currently
competing?
risk? Assumptions
Does this Do
strategy support
we assume the future
changes in thebecompetition
will volatile?
structure?What assumptions do our
competitors hold about the
industry and themselves?
Are we assuming stable
competitive conditions?
Competitor Analysis
Future Objectives What are the competitor’s
How do our goals compare to capabilities?
Where willCurrent
emphasis Strategy
be
placed in How
the future?
are we currently
risk?
competing? Assumptions
Does thisDo
strategy support
we assume the future
changes will
in the
becompetition
volatile?
structure?
What assumptions do our
competitorsCapabilities
hold about the
industry and
What themselves?
are my competitors’
Are we operating under a
strengths and weaknesses?
status quo?
How do our capabilities
compare to our
competitors?
Dynamic Head-to-Head Rivalry
Future Objectives Response
How do our goals compare to What will our competitors
our competitors’ goals? do in the future?
Where willCurrent
emphasis Strategy
be Where do we have a
placed in How
the future?
are we currently competitive advantage?
What is the attitude toward How will this change our
risk?
competing? Assumptions
Does thisDo
strategy support
we assume the future relationship with our
changes will
in the
becompetition
volatile? competition?
structure?
What assumptions do our
competitorsCapabilities
hold about the
industry What
and themselves?
are my competitors’
Are we operating under a
strengths and weaknesses?
status quo?
How do our capabilities
compare to our competitors?
Market Analysis
The role of market analysis is to determine the
attractiveness of market and to understand its
evolving opportunities and threats as they
relate to internal strength and weakness of the
firm
Dimensions of Market Analysis (David A. Aaker)
• Market size (current and future)

• Market growth rate
• Market profitability
• Industry cost structure
• Distribution channel
• Market trends
• Key success factors
Market Size
The size of the market can be evaluated based on:
• Present sales
• Potential sales (if expanded)
Some information sources for determining market size:

• Government data
• Trade associations
• Financial data from major players
• Customer survey
Market Growth Rate
A simple means of forecasting the market growth rate is to
extrapolate (infer or estimate) historical data into the
future. While this method may provide a first-order
estimate, it does not predict important turning points. A
better method is to study growth drivers such as
demographic information and sales growth in
complementary products.
Ultimately, the maturity and decline stages of the
product life cycle will be reached. Some leading
indicators of the decline phase include:
• Price pressure caused by competition
• Decrease in brand loyalty
• Emergence of substitute products
• Market saturation
• Lack of growth drivers
Market Profitability
While different firms in the market will have

different levels of profitability, the average profit
potential for a market can be used as a guideline
for knowing how difficult it is to make money in
the market.
Industry Cost Structure
The cost structure is important for identifying key factors
for success. To this end, Porter’s value chain model is
useful for determining where value is added and for
isolating the costs.
The cost structure also is helpful for formulating strategies

to develop a competitive advantage. For example, in
some environments the experience curve effect can be
used to develop a cost advantage over competitors.
Experience Curve Diagram
Distribution Channel
The following aspects of the distribution system are useful in
a market analysis:
• Existing distribution channel

– can be described by how direct they are to the customer.
• Trends and emerging channels

– new channels can offer the opportunity to develop a competitive advantage.
• Channel power structure

– for example, in the case of a product having little brand equity, retailers have
negotiating power over manufacturers and can capture more margin.
Market Trends
Changes in the market are important because they often

are the source of new opportunities and threats. The
relevant trends are industry-dependent, but some examples
include changes in price sensitivity, demand for variety,
and level of emphasis on service and support. Regional
trends also may be relevant.
Key Success Factors
– Elements that are necessary in order for the firm to achieve its
marketing objectives.
few examples are:

– Access to essential unique resources
– Ability to achieve economies of scale
– Access to distribution channels
– Technological progress
It is important to consider that key success factors may change over time,
especially as the product progresses through its life cycle.
Analysis of the External
Environment
The External Environment
General Environment
• Dimensions in the broader society that influence an industry and
the firms within it:
– Demographic
– Economic
– Political/legal
– Sociocultural
– Technological
– Global
The General Environment: Segments and Elements
Analysis of the External Environments
• General environment
– Focused on the future
• Industry environment
– Focused on factors and conditions influencing a firm’s profitability
within an industry
• Competitor environment
– Focused on predicting the dynamics of competitors’ actions, responses
and intentions
Analysis of the
Internal Environment
• Firms achieve strategic competitiveness and earn
above-average returns when their core competencies
are effectively:
– Acquired.
– Bundled.
– Leveraged.
• Over time, the benefits of any value-creating strategy
can be duplicated by competitors.
Competitive Advantage (cont’d)
• Sustainability of a competitive advantage is a

function of:
– The rate of core competence obsolescence due to
environmental changes.
– The availability of substitutes for the core competence.
– The difficulty competitors have in duplicating or
imitating the core competence.
Internal Analyses’ Outcomes
Unique resources,
capabilities, and
competencies
(required for
sustainable competitive
advantage)
By studying the internal environment, firms identify
what they can do
The Context of Internal Analysis
• Global Economy
– Traditional sources of advantages can be overcome by competitors’
international strategies and by the flow of resources throughout the
global economy.
• Global Mind-Set
– The ability to study an internal environment in ways that are not
dependent on the assumptions of a single country, culture, or context.
• Analysis Outcome
– Understanding how to leverage the firm’s bundle of heterogeneous
resources and capabilities.
Components of Internal Analysis Leading to Competitive
Advantage and Strategic Competitiveness
Creating Value
• By exploiting their core competencies or competitive advantages, firms
create value.
• Value is measured by:
– Product performance characteristics
– Product attributes for which customers are willing to pay
• Firms create value by innovatively bundling and leveraging their

resources and capabilities.
• Superior value  Above-average returns
Creating Competitive Advantage
• Core competencies, in combination with product-market

positions, are the firm’s most important sources of
competitive advantage.
• Core competencies of a firm, in addition to its analysis of
its general, industry, and competitor environments, should
drive its selection of strategies.
The Challenge of Internal Analysis
• Strategic decisions in terms of the firm’s resources,

capabilities, and core competencies:
– Are non-routine.
– Have ethical implications.
– Significantly influence the firm’s ability to earn above-average
returns.
The Challenge of Internal Analysis (cont’d)
• To develop and use core competencies, managers must have:

– Courage
– Self-confidence
– Integrity
– The capacity to deal with uncertainty and complexity
– A willingness to hold people (and themselves) accountable for their
work
Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core
Competencies
Source: Adapted from R. Amit & P. J. H. Schoemaker, 1993, Strategic assets

and organizational rent, Strategic Management Journal, 14: 33.
Resources, Capabilities and Core Competencies
Discovering Core
Competencies • Resources
– Are the source of a firm’s capabilities.
– Are broad in scope.
Core – Cover a spectrum of individual, social and
Competencies
organizational phenomena.
– Alone, do not yield a competitive
Capabilities
advantage.
Resources
•Tangible
•Intangible
Resources
• Resources • Types of Resources
– Are a firm’s assets, including – Tangible resources
people and the value of its brand • Financial resources
name. • Physical resources
– Represent inputs into a firm’s • Technological resources
production process, such as:
• Organizational resources
• Capital equipment
• Skills of employees
– Intangible resources
• Brand names • Human resources
• Financial resources • Innovation resources
• Talented managers • Reputation resources
Tangible Resources
Financial Resources • The firm’s borrowing capacity
• The firm’s ability to generate internal funds
Organizational Resources • The firm’s formal reporting structure and its
formal planning, controlling, and coordinating
systems
Physical Resources • Sophistication and location of a firm’s plant
and equipment
• Access to raw materials
Technological Resources • Stock of technology, such as patents,
trademarks, copyrights, and trade secrets
Sources: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17:
101; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 100–102.
Intangible Resources
Human Resources • Knowledge

• Trust
• Managerial capabilities
• Organizational routines
Innovation Resources • Ideas
• Scientific capabilities
• Capacity to innovate
Reputational Resources • Reputation with customers
• Brand name
• Perceptions of product quality, durability, and
reliability
• Reputation with suppliers
• For efficient, effective, supportive, and
Sources: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13:
mutually beneficial interactions and relationships
136–139; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 101–104.
Discovering Core
Competencies • Capabilities
– Represent the capacity to deploy resources that
have been purposely integrated to achieve a
Core desired end state
Competencies
– Emerge over time through complex interactions
among tangible and intangible resources
Capabilities
– Often are based on developing, carrying and
exchanging information and knowledge through
Resources
the firm’s human capital
•Tangible
•Intangible
Discovering Core
Competencies • Capabilities (cont’d)
– The foundation of many capabilities lies in:
• The unique skills and knowledge of a firm’s
Core employees
Competencies • The functional expertise of those employees
– Capabilities are often developed in specific
Capabilities functional areas or as part of a functional area.
Resources
•Tangible
•Intangible
Examples of Firms’ Capabilities
Functional Areas Capabilities
Distribution Effective use of logistics management techniques
Human resources Motivating, empowering, and retaining employees
Management Effective and efficient control of inventories through
information systems point-of-purchase data collection methods
Marketing Effective promotion of brand-name products
Effective customer service
Innovative merchandising
Management Ability to envision the future of clothing
Effective organizational structure
Manufacturing Design and production skills yielding reliable products
Product and design quality
Miniaturization of components and products
Research & Innovative technology
development Development of sophisticated elevator control solutions
Rapid transformation of technology into new products and processes
Digital technology
Discovering Core
Competencies • Four criteria for determining strategic
capabilities:
Core – Value
Competencies
– Rarity
Capabilities – Costly-to-imitate
– Nonsubstitutability
Resources
•Tangible
•Intangible
Discovering Core • Core Competencies

Competencies – Resources and capabilities that are the sources of a
firm’s competitive advantage:
• Distinguish a company competitively and reflect its
Core personality.
Competencies
• Emerge over time through an organizational
process of accumulating and learning how to
Capabilities
deploy different resources and capabilities.
Resources
•Tangible
•Intangible
Discovering Core
Competencies • Core Competencies
– Activities that a firm performs especially well
compared to competitors.
Core
Competencies
– Activities through which the firm adds unique value
to its goods or services over a long period of time.
Capabilities
Resources
•Tangible
•Intangible
Building Core Competencies
Discovering Core
Competencies • Four Criteria of Sustainable
Four Criteria of – Valuable capabilities
Sustainable Advantages
– Rare capabilities
– Costly to imitate
• Valuable
• Rare – Nonsubstituable
• Costly to imitate
• Nonsubstitutable
The Four Criteria of Sustainable Competitive Advantage
Valuable Capabilities • Help a firm neutralize threats or

exploit opportunities
Rare Capabilities • Are not possessed by many others
Costly-to-Imitate Capabilities • Historical: A unique and a valuable
organizational culture or brand name
• Ambiguous cause: The causes and
uses of a competence are unclear
• Social complexity: Interpersonal
relationships, trust, and friendship among
managers, suppliers, and customers
Nonsubstitutable Capabilities • No strategic equivalent
Building Sustainable Competitive Advantage
Discovering Core • Valuable capabilities
Competencies – Help a firm neutralize threats or exploit
opportunities.
• Rare capabilities
Four Criteria of – Are not possessed by many others.
• Valuable
• Rare
Discovering Core
Competencies • Costly-to-Imitate Capabilities
– Historical
• A unique and a valuable organizational culture
Four Criteria of or brand name
Sustainable Advantages – Ambiguous cause
• The causes and uses of a competence are
unclear
– Social complexity
• Valuable
• Rare • Interpersonal relationships, trust, and friendship
• Costly to Imitate among managers, suppliers, and customers
Discovering Core • Nonsubstitutable Capabilities

Competencies – No strategic equivalent
• Firm-specific knowledge
• Organizational culture
Four Criteria of • Superior execution of the chosen business model
• Valuable
• Rare
Outcomes from Combinations of the Criteria for Sustainable
Scenario Analysis
What is Scenario?
-Engage in systematic conjecture
-Human beings are constantly

writing scenarios, interpreting
signals in the environment and
reframing them into meaningful
images and trajectories in to the
future.
Introduction
• For Many years, it was believed obtaining accurate forecasts
lay in the development of complex, quantitative models.
• With just a little more time, a few more equations and a lot
more dollars, these models would be able to provide forecast.
• Many users have become disillusioned with forecasting
models, attempt to predict the future from fancy mathematical
manipulations of historical data.
Feedback and feed-forward
Scenario planning is the combination of scenario analysis for strategic
purposes and strategic planning based on the outcome of the scenario
phase
The relations between possible, probable and desired
future
What is not Scenario?
• Scenario is not a forecast, neither a vision
• It does not seek numerical precision.
It usually provides a more qualitative and contextual
description of how the present will evolve in to the
future.
• It is not assured.
Scenario analysis usually tries to identify a set of
possible future, each of whose occurrence is plausible
Definition of Scenario
• Vocabulary:
Scenario is an outline of a natural or expected course of events.
• Kahn and Weiner:
A hypothetical sequence of events constructed for the purpose of focusing attention.
• Porter
An internally consistent view of what the future might turn out to be
• Ringland:
That part of strategic planning which relates to the tools and technologies for managing
the uncertainties of the future
• Schnaars:
Identify plausible future environments that the firm might face.
Forecasting and Uncertainty
Crude Oil Rigs in US, (Prediction)
Crude Oil Rigs in US, (Reality)
Future is not continuation of the past necessarily
Scenario in Business
• 22% of “Fortune 1000”, were using scenario analysis in
the 1970s
• 75% of these firms adopted the approach after the oil
embargo in 1973
• It is essential to keep the number of factors that are
considered to a minimum.
Time Horizon
• Scenario analysis has been used primarily in long-term
forecasting.
• Most firms that used scenario analysis employed 5-year
horizon.
• But in Xerox 15-year
Shell, 15-year at least.
• The content of scenario becomes progressively more vague
as the time horizon lengthens.
• The ideal time horizon of scenario analysis is specific to the
industry, product or market under consideration.
Historical Background
• Herman Kahn: was writing scenarios as far back as the
1950s.
• “Thinking the Unthinkable”
• Shell in 1970s.
• SRI (Stanford Research Institute): Future of American Society until
2000.
SRi
History
The Number of Scenarios to Generate
• Consensus is that three scenario are best. Although

two tend to classified as “good-and-bad”, while
more than three become unmanageable in the hands
of users.
Arraying Scenarios
• Scenarios are inevitably arrayed over some back-ground themes.
• Four background themes:
1-Favorability to the Sponsor:
Selecting an optimistic and then an pessimistic.
“Surprise-free” or ‘baseline” scenario
2-Probability of Occurrence
One of the scenarios is labeled as “most likely”.
Scenarios are possibilities, not probabilities.
3-Single, Dominant Issue
Sometimes there is a single dominant factor whose outcome is
central to the item being forecast. Like economy, government
policy.
4-Themes
In most business applications there is more than a single unknown. There are many issues
which compete, combine and interact with one another to characterize the future. Three
scenarios as: Economic expansion, Environmental concern, and Technological domination.
Scenario projects could be used for different purposes and
with different focuses
Characteristic of traditional planning compared with the scenario
planning approach
Scenario planning is well suited to the task of dealing with
paradigmatic, non-linear change
Methods of Constructing Scenarios
1-Highly Qualitative Procedures

2-Practical Procedures
3-Cross-Impact Analysis
1-Highly Qualitative Procedures
• Kahn: -A simplistic intuition or an expression of

bias rather than a careful synthesis and
balancing of the analysis with more
subtle qualitative considerations.
-“Surprise-free” scenario
• Godet: -”Exploratory Prospective Analysis”
-Holistic and integrative analysis
• Durand: -Intuitive analysis
Critic: They rely so heavily on intuitive and subjective analysis that

they are difficult to implement.
2-Practical Procedures
• More practical means of generating scenarios in business
environment:
-Identifying factors are expected to affect forecasting situation at
hand.
-Postulating a set of plausible future values for each of these
factors.
-Selecting a few plausible scenarios from a large number of
possible combinations of the values of these factors.
• Two Approaches on selecting strategies:
-Deductive
-Inductive
3-Cross-Impact Analysis
• Emerged from early work on the Delphi Technique
• It’s Basic philosophy of Cross-Impact is that no development
occurs in isolation. Rather, it is rendered more or likely by the
occurrence of other events.
• Cross-Impact attempts to capture these ‘cross-impacts’ from the
judgmental estimates of experts.
• Data from experts are then input into a computer simulation or
mathematical program.
Critic: Judgmental estimates are surely not amenable to any
mathematical machinations.
Few Comments on Scenarios
1. The most important part of scenario analysis is to think about the
problem.
2. The most difficult in scenario analysis is how to reduce a large
number of potential future outcomes to a few plausible scenarios.
The number of possible scenarios grows quickly as the number of
factors increases.
3. Two methods:
-Inductive: If the number of factors is small (<5), examine every
possible scenarios from this set.
-Deductive: When many factors are considered, rather than
examining every possible combination, set the tone of scenarios.
It means to decide whether the scenarios will represent an
optimistic and pessimistic views of the future, or characterize
some dominant themes.
Advantages of Scenario
• Scenario writing is a planning instrument.
• It is also an effective learning tool.
Thinking in scenarios helps us understand the logic of
developments, clarify driving forces, key factors, key players
and our potential to exert an influence.
• It proceeds more from the gut than from the computer.
Although it may incorporate the results of quantitative
models.
• It shows a slight accuracy comparing with other models
of forecasting. Specially when uncertainty is high.
Scenario as powerful instrument
• Brain-compatible format: Scenario thinking matches the way the
brain function. Narrative format (images and stories) makes them easily
memorable.
• Opening-up of divergent thinking: By forcing your mind to
think about qualitatively different directions, you train your capability to
think the unthinkable.
• Complexity-reducing format: Complex business or general
environments can be reduced to a manageable amount of uncertainty.
• Communicative format: Scenarios are easy to communicate and to
discuss.
Weaknesses of Scenario
If scenarios are powerful, why haven’t they been more widely
used?
• Uncertainty in conclusions: It does not give one single answer about the
future. Therefore it does not provide the security that is often required in decision
making.
• Counterintuitive to managerial simplicity: It does not accord with the
managerial simplicity that says that there is one right answer to every question. Scenario
planning is a more holistic or systemic approach to planning than traditional methods.
• Soft methods and soft answers: Scenario techniques are usually qualitative,
the results are often presented in qualitative terms that fir poorly with traditional
numbers-oriented cultures.
• Time consuming: Workshop-based methods are time consuming in terms of the
number of hours and days the participants need to spend to get thorough results.
• Secrecy: Most of Scenarios adopted in the companies are arcane and impractical
Scenario Analysis at Shell
• Shell makes use of a strategic planning process in which a series of “what if “

scenarios are created
Strategy
• The management at all levels is made to think strategically about the
company’s business environment
Shell’s scenario analysis

Identify trends and their drivers Testimonial
Develop the what, why and how of different scenarios In early 1986, the price of oil fell to USD 10
per barrel and Shell’s scenario analysis
proved successful as it was in a better
Identify parameters to monitor the environment
position than its competitors to face the
situation
Develop contingent strategies to tackle each scenario
• Shell has deployed processes and systems to anticipate future scenarios by analyzing the interplay of environmental factors
and its impact on Shell’s business
• Scenario analysis presents complex interactions of future in a simplified, easy to understandable form
• By picking the more probable scenarios, the company can brace or prepare itself for exploiting future opportunities and
challenges
• It helps the company in formulating strategy and decide the trade-offs required
SWOT Analysis
SWOT Analysis
Identifying
internal strengths (S)
and weaknesses (W)
and also examining
external opportunities (O) and
threats (T)
S
Internal
Things
Things the
the company
company does
does well.
well.
W Things
Things the
the company
company does
does not
not do
do well.
well.
O
External
Conditions
Conditions in
favor
in the
favor strengths.
strengths.
the external
external environment
environment that
that
Conditions
Conditions in in the
the external
external environment
environment that
T
that
do
do not
not relate
relate to to existing
existing strengths
strengths or
or favor
favor
areas of
of current
areas©South-Western
current weakness.
weakness.
College Publishing
Strengths
Strengths and
and Weaknesses
Weaknesses
INTERNAL
INTERNAL
 Production Costs
 Marketing Skills
 Employee Capabilities
 Financial Resources
 Available Technology
 Company/Brand Image
Wal- Mart SWOT Analysis
Strengths
• Wal-Mart is powerful retail brand.
• Wal-Mart has grown substantially over recent years and has experienced global expansion.
• Wal-Mart has a core competence involving its use of IT to support its international logistics
system.
• A focused strategy is in place for HRM and development.
Weaknesses
• Wal- Mart is the World’s largest grocery retailer and control of its empire, despite its IT
advantages, could leave it week in some areas due to the huge span of control
• Since Wal-Mart sell products across many sectors, it may not have the flexibility of
some of its more focused competitors.
• The company is global, but has a presence in relatively few countries Worldwide.
Opportunities
Opportunities and
and Threats
Threats
EXTERNAL
EXTERNAL
Social Technological
Demographic Political/Legal
Economic Competitive
Opportunities
• To take over, merge with, or form strategic alliances with other global retailers.
• There are tremendous opportunities for future business expansion.
• New locations and store types offer Wal-Mart opportunities.
• Opportunities exist for Wal-Mart to continue with its current strategy of large, super
centres.
Threats
• Being number one means that Wal-Mart is the target of competition, locally and globally.
• Being a global retailer means that Wal-Mart is exposed to political problems in the
countries where it has operations.
• Intense price competition.
TOWS Matrix
Four Types of Strategies
Threats SO WO
Opportunities Strategies Strategies
Weaknesses
Strengths ST WT
(TOWS) Strategies Strategies
SO Strategies
Threats Use a firm’s

Opportunities SO internal
strengths to
Weaknesses Strategies
take advantage
Strengths of external
(TOWS) opportunities
WO Strategies
Improving
Threats internal
Opportunities WO weaknesses by
Weaknesses Strategies taking
Strengths advantage of
(TOWS) external
opportunities
ST Strategies
Threats Using firm’s

Opportunities ST strengths to
avoid or reduce
the impact of
Strengths external
(TOWS) threats.
WT Strategies
Defensive
Threats tactics aimed at
Opportunities WT reducing
internal
weaknesses and
Strengths avoiding
(TOWS) environmental
threats.
Strategy Analysis & Choice
The TOWS Matrix
• List the firm’s key external opportunities

• List the firm’s key external threats
• List the firm’s key internal strengths
• List the firm’s key internal weaknesses
The TOWS Matrix
• Match internal strengths with external opportunities and record
the resultant SO Strategies
• Match internal weaknesses with external opportunities and
record the resultant WO Strategies
• Match internal strengths with external threats and record the
resultant ST Strategies
• Match internal weaknesses with external threats and record the
resultant WT Strategies
TOWS Matrix
Leave Blank Strengths-S Weaknesses-W
List Strengths List Weaknesses
Opportunities- SO Strategies WO Strategies

O
Use strengths to take Overcome
List Opportunities advantage of weaknesses by taking
opportunities advantage of
Threats-T ST Strategies WT Strategies
opportunities
List Threats Use strengths to avoid Minimize weaknesses

threats and avoid threats
Module-III (Strategic Choice )
319
Module III (Contents)
• Traditional Approach - Strategic Alternatives
• Various models like BCG, GE Nine Cell Matrix, Hofer’s Model, Strickland’s Grand
Strategy Selection Matrix, Basis of Choice
• Michael Porter’s Approach - Generic competitive strategies, Cost advantage,

differentiation,
• Technology and competitive advantage, substitution, competitor, complementary products

and competitive advantage
• Strategic vision vs. strategic opportunism
• Coevolving and patching.

Learning Objectives
1. Discuss seven different topics for long-term corporate objectives
2. Describe the five qualities of long-term corporate objectives that make them useful
to strategic managers
3. Explain the generic strategies of low-cost leadership, differentiation, and focus
4. Discuss the importance of the value disciplines
5. List, describe, evaluate, and give examples of 15 grand strategies that decision
makers use in forming their company’s competitive plan
6. Understand the creation of sets of long-term objectives and grand strategies options
7-321
Long-Term Objectives
• Strategic managers recognize that short-run profit maximization is rarely the best
approach to achieving sustained corporate growth and profitability
• To achieve long-term prosperity, strategic planners commonly establish long-term
objectives in seven areas:
– Profitability – Productivity
– Competitive Position – Employee Development
– Employee Relations – Productivity
– Tech Leadership – Public Responsibility
7-322
Qualities of Long-Term Objectives
• There are five criteria that should be used in preparing long-term

objectives:
– Flexible
– Measurable
– Motivating
– Suitable
– Understandable
7-323
The Balanced Scorecard
• The balanced scorecard is a set of measures that are directly linked to the
company’s strategy
– Developed by Robert S. Kaplan and David P. Norton, it directs a company to
link its own long-term strategy with tangible goals and actions.
– The scorecard allows managers to evaluate the company from four
perspectives:
• financial performance
• customer knowledge
• internal business processes
• learning and growth
7-324
The Balance Scorecard
7-325
Generic Strategies
• A long-term or grand strategy must be based on a core idea about
how the firm can best compete in the marketplace. The popular
term for this core idea is generic strategy.
• 3 Generic Strategies:
1. Striving for overall low-cost leadership in the industry.
2. Striving to create and market unique products for varied customer groups
through differentiation.
3. Striving to have special appeal to one or more groups of consumers or
industrial buyers, focusing on their cost or differentiation concerns.
7-326
Low-Cost Leadership
• Low-cost producers usually excel at cost reductions and efficiencies

• They maximize economies of scale, implement cost-cutting
technologies, stress reductions in overhead and in administrative
expenses, and use volume sales techniques to propel themselves up the
earning curve
• A low-cost leader is able to use its cost advantage to charge lower prices
or to enjoy higher profit margins
7-327
Differentiation
• Strategies dependent on differentiation are designed to appeal to customers with
a special sensitivity for a particular product attribute
• By stressing the attribute above other product qualities, the firm attempts to build
customer loyalty
• Often such loyalty translates into a firm’s ability to charge a premium price for
its product
• The product attribute also can be the marketing channels through which it is
delivered, its image for excellence, the features it includes, and its service
network
7-328
Focus
• A focus strategy, whether anchored in a low-cost base or a differentiation base,
attempts to attend to the needs of a particular market segment
• A firm pursuing a focus strategy is willing to service isolated geographic areas; to
satisfy the needs of customers with special financing, inventory, or servicing
problems; or to tailor the product to the somewhat unique demands of the small-
to medium-sized customer
• The focusing firms profit from their willingness to serve otherwise ignored or
underappreciated customer segments
7-329
Risks of the Generic Strategies
7-330
Lower Cost Differentiation
Broad Cost Leadership Differentiation

Competitive Scope
Target
Narrow Cost Focus Differentiation Focus

Target
The Value Disciplines
• Operational Excellence • Product Leadership

– This strategy attempts to lead the – Companies that pursue the discipline
of product leadership strive to
industry in price and convenience
produce a continuous state of state-
by pursuing a focus on lean and of-the-art products and services
efficient operations
• Customer Intimacy
– Customer intimacy means
continually tailoring and shaping
products and services to fit an
increasingly refined definition of
the customer
Grand Strategies
• Grand strategies, often called master or business strategies, provide
basic direction for strategic actions
• Indicate the time period over which long-rang objectives are to be
achieved
• Any one of these strategies could serve as the basis for achieving the
major long-term objectives of a single firm
• Firms involved with multiple industries, businesses, product lines, or
customer groups usually combine several grand strategies
7-333
Concentrated Growth
• Concentrated growth is the strategy of the firm that directs its
resources to the profitable growth of a dominant product, in a dominant
market, with a dominant technology
• Concentrated growth strategies lead to enhanced performance
• Specific conditions favor concentrated growth
• The risks and rewards vary
7-334
Market Development
• Market development commonly ranks second only to concentration as
the least costly and least risky of the 15 grand strategies
• It consists of marketing present products, often with only cosmetic
modifications, to customers in related market areas by adding channels
of distribution or by changing the content of advertising or promotion
• Frequently, changes in media selection, promotional appeals, and
distribution are used to initiate this approach
7-335
Product Development
• Product development involves the

substantial modification of existing products
or the creation of new but related products
that can be marketed to current customers
through established channels
7-336
Innovation
• These companies seek to reap the initially high profits associated with
customer acceptance of a new or greatly improved product
• Then, rather than face stiffening competition as the basis of profitability
shifts from innovation to production or marketing competence, they
search for other original or novel ideas
• The underlying rationale of the grand strategy of innovation is to create
a new product life cycle and thereby make similar existing products
obsolete
7-337
Horizontal Integration
• When a firm’s long-term strategy is based on

growth through the acquisition of one or more
similar firms operating at the same stage of the
production-marketing chain, its grand strategy is
called horizontal integration
• Such acquisitions eliminate competitors and
provide the acquiring firm with access to new
markets 7-338
Vertical Integration
• When a firm’s grand strategy is to acquire firms that supply it with
inputs (such as raw materials) or are customers for its outputs
(such as warehouses for finished products), vertical integration is
involved
• The main reason for backward integration is the desire to increase
the dependability of the supply or quality of the raw materials used
as production inputs
7-339
Vertical and Horizontal Integration
7-340
Concentric Diversification
• Concentric diversification involves the acquisition of businesses

that are related to the acquiring firm in terms of technology, markets,
or products
• With this grand strategy, the selected new businesses possess a high
degree of compatibility with the firm’s current businesses
• The ideal concentric diversification occurs when the combined
company profits increase the strengths and opportunities and decrease
the weaknesses and exposure to risk
7-341
Conglomerate Diversification
• Occasionally a firm, particularly a very large one, plans acquire a business
because it represents the most promising investment opportunity available.
This grand strategy is commonly known as conglomerate diversification.
• The principal concern of the acquiring firm is the profit pattern of the venture
• Unlike concentric diversification, conglomerate diversification gives little
concern to creating product-market synergy with existing businesses
7-342
Turnaround
The firm finds itself with declining profits
• Among the reasons are economic recessions, production inefficiencies, and
innovative breakthroughs by competitors
• Strategic managers often believe the firm can survive and eventually recover if
a concerted effort is made over a period of a few years to fortify its distinctive
competences. This is turnaround.
• Two forms of retrenchment:
– Cost reduction
– Asset reduction
7-343
Elements of Turnaround
• A turnaround situation represents absolute and relative-to-industry declining
performance of a sufficient magnitude to warrant explicit turnaround actions
• The immediacy of the resulting threat to company survival is known as situation
severity
• Turnaround responses among successful firms typically include two stages of
strategic activities: retrenchment and the recovery response
• The primary causes of the turnaround situation have been associated with the
second phase of the turnaround process, the recovery response
7-344
Divestiture
• A divestiture strategy involves the sale of a firm or
a major component of a firm
• When retrenchment fails to accomplish the desired
turnaround, or when a nonintegrated business activity
achieves an unusually high market value, strategic
managers often decide to sell the firm
• Reasons for divestiture vary
7-345
Liquidation
• When liquidation is the grand strategy, the firm
typically is sold in parts, only occasionally as a
whole—but for its tangible asset value and not
as a going concern
• Planned liquidation can be worthwhile
7-346
Bankruptcy
• Liquidation bankruptcy—agreeing to a complete distribution of
firm assets to creditors, most of whom receive a small fraction of
the amount they are owed
• Reorganization bankruptcy—the managers believe the firm can
remain viable through reorganization
• Two notable types of bankruptcy
7-347
Joint Ventures
• Occasionally two or more capable firms lack a necessary component
for success in a particular competitive environment
• The solution is a set of joint ventures, which are commercial
companies (children) created and operated for the benefit of the co-
owners (parents)
• The joint venture extends the supplier-consumer relationship and has
strategic advantages for both partners
7-348
Strategic Alliances
• Strategic alliances are distinguished from joint
ventures because the companies involved do
not take an equity position in one another
• In some instances, strategic alliances are
synonymous with licensing agreements
• Outsourcing arrangements vary
7-349
Consortia, Keiretsus, and Chaebols
• Consortia are defined as large interlocking relationships between

businesses of an industry
• In Japan such consortia are known as keiretsus, in South Korea as
chaebols
• Their cooperative nature is growing in evidence as is their market
success
7-350
Selection of Long-Term Objectives and Grand Strategy
Sets
• When strategic planners study their opportunities, they try to
determine which are most likely to result in achieving various
long-range objectives
• Almost simultaneously, they try to forecast whether an
available grand strategy can take advantage of preferred
opportunities so the tentative objectives can be met
• In essence, then, three distinct but highly interdependent
choices are being made at one time
Sequence of Selection
and Strategy Objectives
• The selection of long-range objectives and grand
strategies involves simultaneous, rather than sequential,
decisions
• While it is true that objectives are needed to prevent the
firm’s direction and progress from being determined by
random forces, it is equally true that objectives can be
achieved only if strategies are implemented
7-352
Strickland Grand Strategy
Selection Model
Grand Strategy Matrix
• Popular tool for formulating alternative strategies

• Based on two evaluative dimensions
 Competitive position
 Market growth
RAPID MARKET GROWTH
Quadrant II Quadrant I
• Market development • Market development
• Market penetration • Market penetration
• Product development • Product development
• Horizontal integration • Forward integration
• Divestiture • Backward integration
• Liquidation • Horizontal integration
WEAK • Concentric diversification STRONG
COMPETITIVE COMPETITIVE
POSITION Quadrant III Quadrant IV
POSITION
• Retrenchment • Concentric diversification
• Concentric diversification • Horizontal diversification
• Horizontal diversification • Conglomerate diversification
• Conglomerate diversification • Joint ventures
• Liquidation
SLOW MARKET GROWTH

• Quadrant I
 Excellent strategic position
 Concentration on current markets and products
 Take risks aggressively when necessary
• Quadrant II
 Evaluate present approach seriously
 How to change to improve competitiveness
 Rapid market growth requires intensive strategy
• Quadrant III
 Compete in slow-growth industries
 Weak competitive position
 Drastic changes quickly
 Cost and asset reduction indicated (retrenchment)
• Quadrant IV
 Strong competitive position
 Slow-growth industry
 Diversification indicated to more promising growth areas
Hofer’s Model
Life Cycle – Market Evolution Matrix
Dimensions
STAGE OF INDUSTRY EVOLUTION
• Early Development
• Rapid Growth/Takeoff
• Shake-Out
• Maturity/Saturation
• Decline/Stagnation
COMPETITIVE POSITION
The Life-Cycle Portfolio Matrix The business unit competitive
position
Strong Average Weak
Development
The Industry’s stage in the

evolutionary life cycle Growth
Competitive
shakeout
Maturity
Saturation
Decline
Advantages
• Used to identify developing winners
• Illustrates how businesses are distributed across the stages
of industry evolution
BCG Matrix
Boston Consulting Group Matrix
(BCG)
• Enhances multidivisional firms’ efforts to formulate strategies

• Autonomous divisions (or profit centers) constitute the business portfolio
• Firm’s divisions may compete in different industries requiring separate strategy
(BCG)
• Graphically portrays differences among divisions

• Focuses on market share position and industry growth rate
• Manage business portfolio through relative market share position
and industry growth rate
(BCG)
• Relative market share position defined:
 Ratio of a division’s own market share in a particular industry to the market share held by
the largest rival firm in that industry.
BCG Matrix
Relative Market Share Position
High Medium Low
1.0 .50 0.0
High
+20
Stars Question Marks

II I
Medium
0
Cash Cows Dogs

III IV
udnI
Low
-20
BCG Matrix
• Question Marks
• Stars
• Cash Cows
• Dogs
BCG Matrix
• Question Marks
 Low relative market share position yet compete in
high-growth industry.
 Cash needs are high
 Case generation is low
 Decision to strengthen (intensive strategies) or divest
BCG Matrix
• Stars
 High relative market share and high industry growth
rate.
 Best long-run opportunities for growth and profitability
 Substantial
investment to maintain or strengthen
dominant position
 Integration strategies, intensive strategies, joint ventures
BCG Matrix
• Cash Cows
 Highrelative market share position, but compete in
low-growth industry
 Generate cash in excess of their needs
 Milked for other purposes
 Maintain strong position as long as possible
 Product development, concentric diversification
 If becomes weak—retrenchment or divestiture
BCG Matrix
• Dogs
 Low relative market share position and compete in
slow or no market growth
 Weak internal and external position
 Decision to liquidate, divest, retrenchment
GE Nine Cell Matrix
GE Nine-Cell Matrix
Industry • Relative Costs
Attractiveness • Profit Margins
• Market Size • Fit with KSFs
• Growth Rate
• Profit Margin
10.0 Strong 6.7 Average 3.3 Weak 1.0
• Intensity of Competition
• Seasonality
• Cyclicality High
• Resource Requirements
• Social Impact 6.7
• Regulation
• Environment Medium
• Opportunities & Threats
3.3
• Relative Market Share
• Reputation/ Image Low
• Bargaining Leverage
• Ability to Match Quality/Service 1.0
Rating Scale: 1 = Weak ; 10 = Strong

Strategy Implications of Attractiveness/Strength
Matrix
• Businesses in upper left corner
– Accorded top investment priority
– Strategic prescription is grow and build
• Businesses in three diagonal cells
– Given medium investment priority
– Invest to maintain position
• Businesses in lower right corner
– Candidates for harvesting or divestiture
– May be candidates for an overhaul and reposition strategy
The Attractiveness/Strength Matrix
• Allows for intermediate rankings between high and low and between strong
and weak
• Incorporates a wide variety of strategically relevant variables
• Stresses allocating corporate resources to businesses with greatest potential
for
– Competitive advantage and
– Superior performance
Business Level Strategies
Learning Objectives
1. Determine why a business would choose a low-cost, differentiation, or speed-

based strategy
2. Explain the nature and value of a market focus strategy
3. Illustrate how a firm can pursue both low-cost and differentiation strategies
4. Identify requirements for business success at different stages of industry
evolution
5. Determine good business strategies in fragmented and global industries
6. Decide when a business should diversify
Levels of Planning at General Electric
Levels and Types of Planning
What Is Business-Level Strategy?
• Business-level strategy
– A plan of action to use the firm’s resources and distinctive competencies to
gain competitive advantage.
• Abell’s “Business Definition” process
– Customer needs – product differentiation (what)
– Customer groups – market segmentation (who)
– Distinctive competencies – competitive actions (how)
Choosing a Generic Business-Level Strategy
• Product/Market/Distinctive-Competency Choices and Generic Competitive Strategies
Cost Leadership Differentiation Focus
Product Low High Low to high

Differentiation (principally (principally by uniqueness) (price or uniqueness)
by price)
Market Low High Low

Segmentation (mass market) (many market segments) (one or a few segments)
Distinctive Manufacturing Research and development, sales Any kind of distinctive

Competency and materials management and marketing competency
Choosing a Business-Level Strategy
• Cost-leadership strategy success is affected by:

– Competitors producing at equal or lower costs.
– The bargaining strength of suppliers.
– Powerful buyers demanding lower prices.
– Substitute products moving into the market.
– New entrants overcoming entry barriers.
• Differentiation strategy success is achieved through:
– An emphasis on product or service quality.
– Innovation in providing new features for which customers will pay a premium
price.
– Responsiveness to customers after the sale.
– Appealing to the psychological desires of customers.
• Differentiation strategy success is affected by:
– Competitors imitating features and services.
– Increases in supplier costs exceeding differentiator’s price premium.
– Buyers becoming less brand loyal.
– Substitute products adding similar features.
– New entrants overcoming entry barriers related to differentiator’s competitive
advantage.
• Focus strategy success is affected by:
– Competitor entry into focuser’s market segment.
– Suppliers capable of increasing costs affecting only the focuser.
– Buyers defecting from market segment.
– Substitute products attracting customers away from focuser’s segment.
– New entrants overcoming entry barriers that are the source of the focuser’s
Strategic Groups and Business-Level Strategy
• Implications for business-level strategy
– Immediate competitors are companies pursuing same strategy within the same
strategic group.
– Different strategic groups can have a different standing with respect to the
effects of the five competitive forces.
• First mover advantage
– Benefits are first choice of customers and suppliers, setting standards,
building entry barriers.
Choosing an Investment Strategy at the Business
Level
• Investment strategy
– The resources (human, functional, and financial) required to gain sustainable
• Competitive position
– Market share is an indicator of competitive strength.
– Distinctive competencies are competitive tools.
• Life Cycle Effects
– An industry’s life cycle stage affects its attractiveness to investment prospects.
Choosing an Investment Strategy at the Business
Level
•Stage of the Industry Life •Strong Competitive •Weak Competitive
Cycle Position Position
•Embryonic •Share building •Share building
•Growth •Growth •Market concentration
•Shakeout •Share increasing •Market concentration or

harvest/liquidation
•Maturity •Hold-and-maintain or profit •Harvest or liquidation/divestiture
•Decline •Market concentration or harvest (asset •Turnaround, liquidation,

reduction) or divestiture
Evaluating and Choosing Business Strategies: Seeking Sustained Competitive
Advantage
• The two most prominent sources of competitive advantage can be

found in the business’s cost structure and its ability to differentiate
the business from competitors
• Businesses that have one or more sources/capabilities that let them
operate at a lower cost will
consistently outperform their
rivals that don’t
Evaluating Cost Leadership Opportunities
• Business success built on cost leadership requires

the business to be able to provide its product or
service at a cost below what its competitors can
achieve
Sustainable Low-Cost Activities
1. Some low-cost advantages reduce the likelihood of buyers’

pricing pressure
2. Truly sustained low-cost advantages may push rivals into other
areas
3. New entrants competing on price must face an entrenched cost
leader
4. Low-cost advantages should lessen the attractiveness of
substitute products
Sustainable Low-Cost Activities
1. Higher margins allow low-cost producers to withstand

supplier cost increases
2. Many cost-saving activities are easily duplicated
3. Exclusive cost leadership can be a trap
4. Obsessive cost cutting can shrink other competitive
advantages
5. Cost differences often decline over time
Evaluating Differentiation
• Differentiation requires that the business have sustainable
advantages that allow it to provide buyers with something
uniquely valuable to them
• Differentiation usually arises from one or more activities in the
value chain that create a unique value important to buyers
• Strategists use benchmarking and consider the 5 forces in
considering differentiation
Evaluating Speed as a Competitive Advantage
• Speed-based strategies, or rapid response to

customer requests or market and technological
changes, have become a major source of
competitive advantage for numerous firms in
today’s intensely competitive global economy
Speed can be created by:
• Customer responsiveness
• Product development cycles
• Product or service improvements
• Speed in delivery or distribution
• Information Sharing and Technology
Risks of Speed-based Strategy
• Speeding up activities that haven’t been conducted in a fashion that prioritizes

rapid response should only be done after considerable attention to training,
reorganization, and/or reengineering
• Some industries may not offer much advantage to the firm that introduces some
forms of rapid response
• Customers in such settings may prefer the slower pace or the lower costs
currently available, or they may have long time frames in purchasing
Evaluating Market Focus as a Way to Competitive
Advantage
• Market focus: the extent to which a business concentrates on a
narrowly defined market
• Small companies, at least the better ones, usually thrive because they
serve narrow market niches
• Market focus allows some businesses to compete on the basis of low
cost, differentiation, and rapid response against much larger businesses
with greater resources
Risks of Market Focus
• The risk of focus is that you attract major competitors
who have waited for your business to “prove” the market
• Managers evaluating opportunities to build competitive
advantage should link strategies to
• Resources
• Capabilities
• Value chain activities that exploit low cost, differentiation, and
rapid response
Stages of Industry Evolution and Business Strategy Choices
• The requirements for success in industry segments change over time

• Strategists can use these changing requirements, which are associated
with different stages of industry evolution, as a way to isolate key
competitive advantages and shape strategic choices around them
Emerging Industries
• Emerging industries are newly formed or re-formed industries that

typically are created by technological innovation, newly emerging
customer needs, or other economic or sociological changes
• There are no “rules of the game”
Business Strategies in
Emerging Industries
• Technologies that are most proprietary to the pioneering firms and technological
uncertainty will unfold
• Competitor uncertainty because of inadequate information about competitors, buyers, and
the timing of demand
• High initial costs but steep cost declines
• Few entry barriers
• First-time buyers requiring initial inducement to purchase
• Inability to obtain raw materials and components until suppliers gear up to meet the
industry’s needs
• Need for high-risk capital because of the industry’s uncertain prospects
Emerging Industries
• For success in this industry setting, business strategies require one or more of these
features:
• The ability to shape the industry’s structure
• The ability to rapidly improve product quality and performance features
• Advantageous relationships with key suppliers and promising distribution channels
• The ability to establish the firm’s technology as the dominant one
• The early acquisition of a core group of loyal customers and then the expansion of that
customer base
• The ability to forecast future competitors
Competitive Advantages and Strategic Choices in Growing
Industries
• Rapid growth brings new competitors into the industry
• At this stage, growth industry strategies that emphasize brand
recognition, product differentiation, and the financial resources to
support both heavy marketing expenses and the effect of price
competition on cash flow can be key strengths
Growth Industries
• For success in this industry setting, business strategies require one or more of the following
features:
– The ability to establish strong brand recognition
– The ability and resources to scale up to meet increasing demand
– Strong product design skills to be able to adapt products and services
– The ability to differentiate the firm’s product[s] from competitors entering the market
– R&D resources and skills to create product variations
– The ability to build repeat buying from established customers
– Strong capabilities in sales and marketing
Competitive Advantages and Strategic Choices in Mature Industries
• As an industry evolves, its rate of growth eventually declines

• Firms working with the mature industry strategies sell increasingly to
experienced, repeat buyers who are now making choices among known
alternatives
• Competition becomes more
oriented to cost and service
as knowledgeable buyers
expect similar price and features
Mature Industries
• Strategy elements of successful firms in maturing industries often include the following:
• Product line pricing
• Emphasis on process innovation that
permits low-cost product design,
manufacturing methods, and distribution
synergy
• Emphasis on cost reduction
• Careful buyer selection to focus on
buyers who are less aggressive, more
closely tied to the firm, and able to buy more from the firm
• Horizontal integration to acquire rival firms whose weaknesses can be used to gain a bargain price
• International expansion to markets where attractive growth and limited competition still exist
Competitive Advantages and Strategic Choices in Declining
Industries
• Declining industries are those that make products or services for which demand is
growing slower than demand in the economy as a whole or is actually declining
• Focus on higher growth
or a higher return
• Emphasize product innovation
and quality improvement
• Emphasize production and
distribution efficiency
• Gradually harvest the business
Competitive Advantage in
Fragmented Industries
• A fragmented industry is one in which no firm has a significant market share

and can strongly influence industry outcomes
• Tightly managed decentralization
• “Formula” facilities
• Increased value added
• Specialization
• Bare bones/no frills
Competitive Advantage in
Global Industries
• A global industry is one that comprises firms whose competitive
positions in major geographic or national markets are fundamentally
affected by their overall global competitive positions
– License foreign firms to produce and distribute the firm’s products
– Maintain a domestic production base and export products to foreign countries
– Establish foreign-based plants and distribution to compete directly in the markets of
one or more foreign countries
Four Generic Global
• Broad-line global competition
• Global focus strategy
• National focus strategy
• Protected niche strategy
Grand Strategy Selection Matrix
Model of Grand Strategy Clusters
Building Value as a Basis for Choosing Diversification or
Integration
• The grand strategy selection matrix and model of

grand strategy clusters are useful tools to help
dominant product company managers evaluate and
narrow their choices among alternative grand
strategies
• Dominant product company managers who choose diversification or
integration eventually create another management challenge
Industry Scenarios
• An industry scenario is a useful mechanism to understand the
strategic implications of uncertainty.
• A scenario is an internally consistent view of what the future might
turn out to be.
• Allow a firm to move away from dangerous single-point forecast of
the future in instances where the future cannot be predicted.
• Can help encourage managers to make their implicit assumptions
about the future explicit and to think beyond the confines of
existing conventional wisdom.
Industry Scenarios (Cont…)
• The firm can then make well informed choices
about how to take the competitive uncertainties it
faces into account.
• The process involves determining the major
uncertainties and the key causal factors that will
drive them.
• Uncertainties are placed in one of three categories:
constant, predetermined, and uncertain.
• The uncertain ones are the critical ones. They can
be listed under the same five key competitive
factors : entry barriers, buyers, rivalry,
substitutes and suppliers.
Example: Industry Scenario Pharmaceutical Industry

Industry Scenarios (Cont…)
• A major purpose of industry scenarios is to ensure

an internal consistency in the firm's view of the
future.
• Having developed and analyzed the set of scenarios,
the net task is to formulate competitive strategy
COMPETITIVE STRATEGIES
The objective of competitive strategy is to knock the

socks of rival companies by doing a significant
better job of providing what buyers are looking for
V-C Framework
Value
Buyer’s Surplus
The Firm’s
Economic
Contribution
Price
Firm’s Profit
Cost
Strategy and Competitive Advantage
• Competitive advantage exists when a firm’s strategy gives it an
edge in
– Attracting customers and
– Defending against competitive forces
Key to Gaining a Competitive Advantage
• Convince customers firm’s product / service offers superior value

– A good product at a low price
– A superior product worth paying more for
– A best-value product
What Is
“Competitive Strategy”?
• Deals exclusively with a company’s
business plans to compete successfully
– Specific efforts to please customers
– Offensive and defensive moves

to counter maneuvers of rivals
– Responses to prevailing market conditions
– Initiatives to strengthen its market position
• Narrower in scope than business strategy

Any competitive advantage currently
held will eventually be eroded by
the actions of competent,
resourceful competitors!
Moves calculated to yield a competitive advantage
Size of
C. Ad.
Build Benefit
Erosion
Up Period
Time
Offensive Vs Defensive Moves
• Competitive strategies: strategic moves multinationals use to defeat competitors
- Offensive competitive strategies: direct attacks to capture market share (Nearly
always result in successful achievement of competitive advantage )
- Defensive competitive strategies: attempts to discourage offensive strategies
(Can protect competitive advantage, but RARELY are the basis for achieving
competitive advantage )
- Counter-parry: fending off a competitor’s attack in one country by attacking in
another country
Examples of Offensive Strategies
• Direct attacks: price cutting, adding new features, or going

after poorly served markets
• End-run offensives: seeking unoccupied markets
• Preemptive competitive strategies: being first to obtain
particular advantageous position
• Acquisitions: buying out a competitor
Types of Strategic Offensive
1. Match / exceed competitive strengths

2. Capitalise on Weaknesses
3. Simultaneous initiatives on many fronts
4. End-run offensives
5. Guerilla offensives
6. Preemptive strikes
ATTACKING COMPETITOR STRENGTHS
Appeal
• Gain market share by out-matching strengths of weaker rivals
• Whittle away at a rival’s competitive advantage
• Challenging strong competitors with a lower price is
foolhardy unless aggressor has a COST ADVANTAGE or
advantage of GREATER FINANCIAL STRENGTH!
ATTACKING COMPETITOR STRENGTHS
Possible Offensive Options
• Offer equally good product at a lower price
• Develop low-cost edge, then use it to under-price rivals
• Leapfrog into next-generation technologies
• Add appealing new features
• Run comparison ads
• Construct new plant capacity in rival’s market strongholds
• Offer a wider product line
• Develop better customer service capabilities
ATTACKING COMPETITOR Weaknesses
Basic Approach
• Concentrate one’s competitive strengths & resources directly against
rivals’ weaknesses
Weaknesses to Attack
• Concentrate on geographic regions where rival has weak market share
• Go after buyer segments rival is neglecting
• Go after more performance-conscious customers of rivals who lag behind
challenger
• Attack rivals with weaker advertising & brand recognition
COMPETITIVE STRATEGY PRINCIPLE
Challenging rivals where they are most
vulnerable is more likely to succeed than
challenging them where they are strongest,
ESPECIALLY when challenger possesses
competitive advantage in areas where rivals
are weak!
LAUNCHING OFFENSIVES ON MANY FRONTS
Objective
• Launch several major initiatives to
– Throw rival off-balance,
– Splinter its attention in many directions, and
– Force it to use substantial resources to defend its position
Appeal
• A challenger with superior resources can overpower a weaker rival
by outspending it across-the-board long enough to “buy its way into
the market”
END-RUN OFFENSIVES
Objective
• DODGE head-to-head confrontations that escalate competitive
intensity and RISK cutthroat competition -- Attempt to
MANEUVER AROUND competition
Appeal
• Gain first-mover advantage in a new arena
• Force competitors into playing catch up
• Change rules of competition in aggressor’s favor
END-RUN OFFENSIVES: APPROACHES
• Move aggressively into new geographic markets where
rivals have no market presence
• Introduce products with different attributes & features to
better meet buyer needs
• Introduce next-generation technologies & leapfrog rivals
• Come up with more support services for customers
GUERRILLA OFFENSES
Approach
• Use principles of surprise & hit-and-run to attack in
locations & at times where conditions are most
favorable to initiator
Appeal
• Well-suited to small challengers with limited
resources
GUERRILLA OFFENSES: OPTIONS
• Focus on narrow target weakly defended by rivals
• Challenge rivals where they are overextended & when they
are encountering problems
• Make random scattered raids on leaders with tactics such as
– Occasional low-balling on price
– Intense bursts of promotional activity
– Legal actions charging antitrust violations, patent infringements,
& unfair advertising
PREEMPTIVE STRIKES
Approach
• Involves moving first to secure an advantageous
position that rivals are foreclosed or discouraged
from duplicating!
PREEMPTIVE STRIKES: OPTIONS
• Expand capacity ahead of demand in hopes of discouraging rivals
from following suit
• Tie up best or cheapest sources of essential raw materials
• Move to secure best geographic locations
• Obtain business of prestigious customers
• Build an image in buyers’ minds that is unique & hard to copy
• Secure exclusive or dominant access to best distributors
• Acquire desirable, but struggling, competitor
Choosing whom to attack?
•Market leaders
•Runner-up firms
•Struggling rivals on verge of going under
•Small local/regional firms with limited
capabilities
OFFENSIVE STRATEGY & COMPETITIVE
ADVANTAGE
• Competitive advantage areas offering strongest basis for a STRATEGIC
OFFENSIVE
• Develop lower-cost product design
• Make changes in production operations that lower costs or enhance differentiation
• Develop product features that deliver superior performance or lower users’ costs
• Give more responsive customer service
• Escalate marketing effort
• Pioneer new distribution channel Chances for strategic success are
• Sell direct to end-users improved when offensive is tied to what
firm does best:
Key skill
Strong functional competence
Offensive marketing Strategies
• Fundamental Principles (Offence)
There are four fundamental principles involved:
1) Assess the strength of the target competitor. Consider the amount of support that the
target might muster from allies. Choose only one target at a time.
2) Find a weakness in the target’s position. Attack at this point. Consider how long it will
take for the target to realign their resources so as to reinforce this weak spot.
3) Launch the attack on as narrow a front as possible. Whereas a defender must defend all
their borders, an attacker has the advantage of being able to concentrate their forces at
one place.
4) Launch the attack quickly. The element of surprise is worth more than a thousand
tanks.
Types of Offensive Strategies
• Frontal Attack –
• This is a direct head-on assault. It usually involves marshaling all
your resources including a substantial financial commitment.
• All parts of your company must be geared up for the assault from
marketing to production.
• It usually involves intensive advertising assaults and often entails
developing a new product that is able to attack the target
competitors’ line where it is strong.
• It often involves an attempt to “liberate” a sizable portion of the
target’s customer base.
In actuality, frontal attacks are rare.
There are two reasons for this.
• Firstly, they are expensive. Many valuable resources will be used and lost in the
assault.
• Secondly, frontal attacks are often unsuccessful. If defenders are able to re-deploy
their resources in time, the attacker’s strategic advantage is lost. You will be
confronting strength rather than weakness.
• Also, there are many examples (in both business and warfare) of a dedicated defender
being able to hold-off a larger attacker. The strategy is suitable when
– the market is relatively homogeneous
– brand equity is low
– customer loyalty is low
– products are poorly differentiated
– the target competitor has relatively limited resources
– the attacker has relatively strong resources
Envelopment Strategy (also called encirclement strategy) –
• This is a much broader but subtle offensive strategy.
• It involves encircling the target competitor.
• This can be done in two ways.
• You could introduce a range of products that are similar to the target product. Each
product will liberate some market share from the target competitor’s product, leaving it
weakened, demoralized, and in a state of siege. If it is done stealthily, a full scale
confrontation can be avoided.
• Alternatively, the encirclement can be based on market niches rather than products. The
attacker expands the market niches that surround and encroach on the target
competitor’s market. This encroachment liberates market share from the target. The
envelopment strategy is suitable when:
– the market is loosely segmented
– some segments are relatively free of well endowed competitors
– the attacker has strong product development resources
– the attacker has enough resources to operate in multiple segments simultaneously
– the attacker has a decentralized organizational structure
• Pepsodent, launched in 1993, was the first toothpaste with a unique anti-bacterial
agent to address the consumer need of checking germs even hours after brushing.
• Pepsodent packs included a Germ Indicator in February-May 2002, which allowed
consumers to see the efficacy in fighting germs for themselves. As a follow-up, in
October 2002, Pepsodent offered Dental Insurance to all its consumers to
demonstrate the confidence the company has in the technical superiority of the
product.
• Pepsodent connects directly with kids and their parents. Pepsodent has always
worked in the direction of an overall awareness of dental health. The relaunch
campaign in October 2003 widened the context to "sweet and sticky" food and
leveraged the truth that children do not rinse their mouths every time they eat,
demonstrating that this makes their teeth vulnerable to germ attack.
• Pepsodent's most recent campaign aims at educating consumers on the need for
germ protection through the night.
• Pepsodent also includes a range of toothbrushes
Colgate has developed a powerful Branding Strategy which has significantly helped the Brand in
acquiring substantial amount of share in the oral care market of India. In order to strengthen its' Brand
Identity, Colgate is still restructuring its Branding Strategy.
Colgate Branding Strategy was strong enough to position the company as a major brand in the oral care
market of India.
The Brand Colgate emerged as a market leader as it bagged considerable amount of market share in all
the segments of oral care market like toothpaste segment, tooth powder segment and toothbrush
segment.
Colgate has succeeded in establishing its Brand Image and gaining substantial market share in spite of
facing tough competition from the brands like Hindusthan Liver, Babool and Anchor.
Still the Brand Colgate is continuously updating and improving its' branding strategy in order to
strengthen its' Brand Name and Brand Identity.
The future Branding Strategy of Colgate may comprise the following steps and actions:
• For maintaining the Brand Equity in the market, every company requires a system of
continuous growth and upgradation . So, in order to develop new products, Colgate may
give emphasis on Research and Development Projects.
• The Brand Strategy of Colgate also aims at reaching to the rich and consuming
customers of rural India by introducing some Ayurvedic Oral Care Products.
• In order to strengthen its' Brand Image in the urban market of India, Colgate may
launch some oral care products specifically targeting the urban youth and the urban
rich class.
• Colgate Branding Strategy aims at introducing some special oral care products which
will focus on functional benefits. The Brand can launch specific oral care products for
different age groups.
• The Branding Strategy of Colgate also plans to customize its packaging techniques,
based on price points. This, in a way will establish a new pricing strategy.
• Colgate Branding Strategy has a objective strengthening its' business promotion
network. The company is undertaking advertising strategies and campaigning programs
with the objective of reaching to the customers of India across income classes
Pepsodent Toothpaste Product Line Colgate Toothpaste Product Line
Pepsodent Complete + Gum Care Colgate Dental Cream

Complete 12 Colgate Total 12
Pepsodent Herbal Colgate Sensitive
Pepsodent Milk Teeth Orange Colgate Max Fresh
Pepsodent Milk Teeth Strawberry Colgate Kids ToothPaste
Pepsodent Sensitive Colgate Fresh Energy Gel
Pepsodent Whitening Colgate Herbal
Colgate Cibaca Family Protection
Colgate Advanced Whitening
Colgate Active Salt
• Leapfrog strategy –
• This strategy involves bypassing the enemy’s forces altogether.
• In the business arena, this involves either developing new
technologies, or creating new business models.
• This is a revolutionary strategy that re-writes the rules of the game.
• The introduction of compact disc technology bypassed the
established magnetic tape based defenders. The attackers won the
war without a single costly battle.
• This strategy is very effective when it can be realized.
Flanking attack –
• This strategy is designed to pressure the flank of
the enemy line so the flank turns inward.
• You make gains while the enemy line is in chaos. In
doing so, you avoid a head-on confrontation with
the main force
Defensive Strategies
Objectives
• Lessen risk of being attacked
• Blunt impact of any attack that occurs
• Influence challengers to aim attacks at other rivals
• Strengthen firm’s present position
• Help sustain any competitive advantage held
DEFENSIVE STRATEGIES: APPROACHES
Approach #1
• Block avenues challengers can take in mounting
offensive attacks
Approach #2
• Make it clear any challenge will be met with strong
counterattack
DEFENSIVE STRATEGIES: APPROACH #1
• Broaden product line to fill gaps rivals may go after
• Keep prices low on models that match rivals
• Sign exclusive agreements with distributors
• Offer free training to buyers’ personnel
• Give better credit terms to buyers
• Reduce delivery times for spare parts
• Increase warranty coverages
• Patent alternative technologies
• Sign exclusive contracts with best suppliers
• Protect proprietary know-how
DEFENSIVE STRATEGIES: APPROACH #2
• Publicly announce management’s strong commitment to maintain present
market share
• Publicly announce plans to construct new production capacity to meet forecasted
demand
• Give out advance information about new products, technological breakthroughs,
& other moves
• Publicly commit firm to policy of matching prices & terms offered by rivals
• Maintain war chest of cash reserves
• Make occasional counter-responses to rivals’ moves
Defensive Marketing Strategies
Fundamental principles (Defence)
• There are five fundamental principles involved:
1) Always counter an attack with equal or greater force.
2) Defend every important market.
3) Be forever vigilant in scanning for potential attackers. Assess the strength
of the competitor. Consider the amount of support that the attacker might
muster from allies.
4) The best defense is to attack yourself. Attack your weak spots and rebuild
yourself anew.
5) Defensive strategies should be the exclusive domain of the market leader.
Types of Defensive Strategies
• Position defense –
• This involves the defense of a fortified position.
• This tends to be a weak defense because you become a “sitting duck”. It can
lead to a siege situation in which time is on the side of the attacker, that is, as
time goes by the defender gets weaker, while the attacker gets stronger.
• In a business context, this involves setting up fortifications such as barriers to
market entry around a product, brand, product line, market, or market segment.
This could include increasing brand equity, customer satisfaction, customer
loyalty, or repeat purchase rate. It could also include exclusive distribution
contracts, patent protection, market monopoly, or government protected
monopoly status. It is best used in homogeneous markets where the defender has
dominant market position and potential attackers have very limited resources.
• Mobile defense –
• This involves constantly shifting resources and developing new strategies
and tactics.
• A mobile defense is intended to create a moving target that is hard to
successfully attack, while simultaneously, equipping the defender with a
flexible response mechanism should an attack occur.
• In business this would entail introducing new products, introducing
replacement products, modifying existing products, changing market
segments, changing target markets, repositioning products, or changing
promotional focus. This defense requires a very flexible organization with
strong marketing, entrepreneurial, product development, and marketing
research skills.
• Flank position - This involves the re-deployment of your
resources to deter a flanking attack. You protect against
potential loss of market share in a segment, by strengthening
your competitive position in this segment with new products
and other tactics. (see flanking marketing warfare strategies)
• Counter offensive - This involves countering an attack with
an offense of your own. If you are attacked, retaliate with an
attack on the aggressor’s weakest point.
Counter-parry
• Popular strategy for multinationals
• Respond to attack by attacking competitor in
another country
– Ex.: Kodak—When Fuji attacked Kodak in the U.S.,
Kodak retaliated by attacking Fuji in Japan.
– Goodyear also attacked Michelin in Europe as response
to attack in U.S.
Strategies for
Using the Internet
• Strategic Challenge – What use of the Internet should a company make in staking
out its position in the marketplace?
• Five Approaches
– Use company web site solely to disseminate product information
– Use company web site as a minor distribution
channel for accessing customers and generating sales
– Use company web site as one of several important
distribution channels for accessing customers
– Use company web site as primary distribution
channel for accessing buyers and making sales
– Use company web site as the exclusive channel
for accessing buyers and conducting sales transactions
Using the Internet to
Disseminate Product Information
• Approach – Website used to provide product information of manufacturers or
wholesalers
– Relies on click-throughs to websites of
dealers for sales transactions
– Informs end-users of location of retail stores
• Issues – Pursuing online sales may
– Signal weak strategic commitment to dealers
– Signal willingness to cannibalize dealers’ sales
– Prompt dealers to aggressively market rivals’ brands
• Avoids channel conflict with dealers – Important where strong support of dealer
networks is essential
Using the Internet as a
Minor Distribution Channel
• Approach – Use online sales to
– Achieve incremental sales
– Gain online sales experience
– Conduct marketing research

• Learn more about buyer tastes and preferences
• Test reactions to new products
• Create added market buzz about products
• Unlikely to provoke much outcry from dealers

Brick-and-Click Strategies: An Appealing Middle
Ground Approach
• Approach
– Sell directly to consumers and
– Use traditional wholesale/retail channels
• Reasons to pursue a brick-and-click strategy
– Manufacturer’s profit margin from online sales is bigger than that from sales
through traditional channels
– Encouraging buyers to visit a firm’s website educates them to the ease and
convenience of purchasing online
– Selling directly to end users allows a manufacturer to make greater use of
build-to-order manufacturing and assembly
Strategies for
Online Enterprises
• Approach – Use Internet as the exclusive
channel for all buyer-seller contact and transactions
• Success depends on a firm’s ability
to incorporate following features
– Capability to deliver unique value to buyers
– Deliberate efforts to engineer a value chain that enables differentiation, lower costs, or better
value for the money
– Innovative, fresh, and entertaining website
– Clear focus on a limited number of competencies and a relatively specialized number of
value chain activities
– Innovative marketing techniques
– Minimal reliance on ancillary revenues
VERTICAL INTEGRATION STRATEGIES
• Vertical integration extends a firm’s competitive scope
within same industry
– BACKWARD into sources of supply
– FORWARD toward end-users of final product
• Moves to vertically integrate can aim at becoming
– FULLY INTEGRATED
– PARTIALLY INTEGRATED
A vertical integration strategy has appeal ONLY if it significantly strengthens a firm’s competitive
position!
APPEAL OF BACKWARD INTEGRATION
• Generates cost savings only if volume needed is big enough to
capture efficiencies of suppliers
• Cost savings potential is strongest when
– Suppliers have sizable profit margins
– Item being supplied is a major cost component
– Necessary technical skills are easily mastered
• A differentiation-based competitive advantage arises when firm
ends up with a better quality part
• Spares firm uncertainty of depending on suppliers of crucial raw
materials
APPEAL OF FORWARD INTEGRATION
• Advantageous for firm to set up its own wholesale-retail
distribution network if
– Undependable distribution channels undermine steady production
operations
• Integration into distribution & retailing may be cheaper than
going through independent distributors
• May help achieve greater product differentiation, allowing
escape from price-oriented competition
• For manufacturer, may provide better access to ultimate
consumer
STRATEGIC DISADVANTAGES OF VERTICAL
INTEGRATION
• Boosts capital requirements
• Results in fixed sources of supply & less flexibility in accommodating
buyer demands for product variety
• Extends firm’s scope of activity, locking it deeper into industry
• Poses problems of balancing capacity at each stage of value chain
• Requires radically different skills & capabilities
• Can reduce firm’s manufacturing flexibility, lengthening design time &
ability to introduce new products
UNBUNDLING & OUTSOURCING STRATEGIES
Involves withdrawing from certain stages in value

chain system and relying on outside vendors to
perform needed activities and services
ADVANTAGES OF OUTSOURCING STRATEGIES
• Activity can be performed better or more cheaply by outside
specialists
• Activity is not crucial to achieving competitive advantage
• Reduces firm’s risk exposure to changing technology and/or
changing buyer preferences
• Streamlines firm operations in ways to
– Cut cycle time
– Speed decision-making
– Reduce coordination costs
• Allows firm to concentrate on its core business
PROS & CONS OF VERTICAL INTEGRATION
• Use of a vertical integration strategy depends on
• If it can enhance performance of strategy-critical activities to EITHER
– Lower costs OR
– Increase differentiation
• Impact on
– Investment costs
– Flexibility & response times
– Administrative overhead of coordination
• If a competitive advantage can be created
FIRST-MOVER ADVANTAGES
• WHEN to make a strategic move is often as crucial as WHAT
move to make
• First-mover advantages arise WHEN
– Pioneering helps build firm’s image & reputation
– Early commitments to raw material suppliers, new technologies, &
distribution channels can produce cost advantage
– Loyalty of first time buyers is high
– Moving first can be a preemptive strike
FIRST-MOVER DISADVANTAGES
Arise WHEN
• Costs of pioneering are sizable & loyalty of first time buyers is
weak
• Rapid technological change allows followers to leapfrog pioneers
• Skills & know-how of pioneers are easily imitated by late movers
• It is easy for latecomers to crack market
Timing of Strategic Moves
Advantages / disadvantages of First Mover
+ if pioneering helps build brand image
+ if early contracts with suppliers etc advantageous
+ first time customer loyalty
+ makes imitation harder
- expense
- rapid change may lead to obsoletion
- weak customer loyalty
- easily imitated
Operationalizing and
Institutionalizing
Strategy
Roadmap
• A Framework for Executing Strategy
• The Principal Managerial Components of the Strategy Execution Process
• Building a Capable Organization
• Staffing the Organization
• Building Core Competencies and Competitive Capabilities
• Matching Organization Structure to Strategy
• Organizational Structures of the Future
Crafting vs. Executing Strategy
Crafting the Strategy Executing the Strategy
• Primarily a market-driven activity • Primarily an operations-driven
• Successful strategy making activity
depends on • Successful strategy execution
– Business vision depends on
– Perceptive analysis of market – Good organization-building and
conditions and company resources people management
and capabilities – Creating a strategy-supportive
– Attracting and pleasing customers culture
– Outcompeting rivals – Continuous improvement
– Using company resources and – Getting things done and delivering
capabilities to forge a competitive good results
advantage
Executing the Strategy
• An action-oriented, make-things happen task involving management’s
ability to
Implementation
– Direct organizational change
involves . . .
– Achieve continuous improvement in
operations and business processes
• Move toward operating excellence
– Create and nurture a

strategy-supportive culture
– Consistently meet or beat performance targets
• Tougher and more time-consuming than crafting strategy

Why Executing Strategy Is a
Tough Management Job
• The demanding variety of managerial

activities to be performed
• Numerous ways to tackle each activity
• Requires good people management skills
• Requires launching and managing
a variety of initiatives simultaneously
• Number of bedeviling issues to be worked out
• Battling resistance to change
• Hard to integrate efforts of many different work groups into a smoothly-functioning
whole
Implementing a Newly Chosen Strategy Requires Adept
Leadership
• Implementing a new strategy

takes adept leadership to
– Convincingly communicate
reasons for the new strategy
– Overcome pockets of doubt
– Build consensus and enthusiasm
– Secure commitment of concerned parties
– Get all implementation pieces in place and coordinated

Who Are the
Strategy Implementers?
• Implementing and executing strategy involves a company’s whole
management team and all employees
– Just as every part of a watch plays a role in making the watch function properly,
it takes all pieces of an organization working cohesively for a strategy
to be well-executed
• Top-level managers must lead the process
and orchestrate major initiatives
– But they must rely on the cooperation of
• Middle and lower-level managers to see that things go well in the various parts of
the organization and
• Employees to perform their roles competently on a daily basis
What Are the Goals of the Strategy Implementing-Executing
Process?
• Unite total organization behind strategy
• See that activities are done in a manner that is conducive to first-rate strategy
execution
• Generate commitment so an enthusiastic

crusade emerges to carry out strategy
• Fit how organization conducts its

operations to requirements of strategy
Characteristics of the Strategy Implementation
Process
• Every manager has an active role
• No proven “formula” for implementing
particular types of strategies
• There are guidelines, but no
absolute rules and “must do it
this way” rules
• Many ways to proceed that are
capable of working
• Cuts across many aspects of “how to manage”
Characteristics of the Strategy Implementation
Process (continued)
• Each implementation situation occurs in a different context, affected by
differing
– Business practices and competitive situations
– Work environments and cultures
– Policies
– Compensation incentives
– Mix of personalities and firm histories
• Approach to implementation/execution
has be customized to fit the situation
• People implement strategies - Not companies!
What Top Executives Have to Do in
Leading the Implementation Process
• Communicate the case for change
• Build consensus on how to proceed
• Install strong allies in areas where they can push implementation along in key business
units
• Empower subordinates to keep process moving
• Establish measures of progress and deadlines
• Reward those who achieve
implementation milestones
• Direct resources to the right places
• Personally lead the strategic change process
and the drive for operating excellence
The Three Components of Building a Capable
Organization
Putting Together a Strong
Management Team
• Assembling a capable management team is a cornerstone of the organization-
building task
• Find the right people to fill each slot

– Existing management team
may be suitable
– Core executive group

may need strengthening
• Promote from within
• Bring in skilled outsiders
Selecting the Management Team: Key Considerations
• Determine mix of
– Backgrounds
– Experiences and know-how
– Beliefs and values
– Styles of managing and personalities
• Personal chemistry must be right

• Talent base needs to be appropriate
• Picking a solid management team needs to be acted on early in implementation
process
Recruiting and Retaining Talented Employees:
Implementation Issues
• Assemble needed human resources and knowledge base for effective
strategy execution
• Biggest challenge facing companies
– How to recruit and retain the best
and brightest talent with strong
skill sets and management potential
• Intellectual capital, not tangible assets, is increasingly being viewed as the

most important investment
– Talented people are a prime source of competitive advantage
Key Human Resource Practices to
Attract and Retain Talented Employees
• Spend considerable effort in screening job applicants, selecting only those
with
– Suitable skill sets
– Energy and initiative
– Judgment and aptitudes for learning
– Ability to adapt to firm’s work
environment and culture
• Put employees through training
programs throughout their careers
• Give promising employees challenging, interesting, and skills-stretching
assignments
Key Human Resource Practices to Attract
and Retain Talented Employees (continued)
• Rotate employees through jobs with great content, spanning functional and
geographic boundaries
• Encourage employees to
– Be creative and innovative
– Challenge existing ways of
doing things and offer better ways
– Submit ideas for new products or businesses
• Foster a stimulating work environment
• Exert efforts to retain high-potential employees with excellent salary and benefits
• Coach average employees to improve their skills
Building Core Competences
and Competitive Capabilities
• Crafting the strategy involves
– Identifying the desired competences and capabilities to build into the strategy and
help achieve competitive advantage
• Good strategy execution requires

– Putting desired competences and capabilities in place,
– Upgrading them as needed, and
– Modifying them as market
conditions evolve
Strategically-Relevant Competences
• Greater proficiency in product development
• Better manufacturing know-how
• Capability to provide better after-sale service
• Faster response to changing customer needs
• Superior cost-cutting skills
• Capacity to speed new products to market
• Superior inventory management systems
• Better marketing and merchandising skills
• Specialized depth in unique technologies
• Greater effectiveness in promoting
union-management cooperation
Expertise in gasoline engine
technology and small engine design
Three-Stage Process of Developing Competences and Capabilities
1. Develop ability to do something
2. As experience builds,
ability can translate into a
competence or capability
3. If ability continues to be polished and refined, it can become a

distinctive competence, providing a potential competitive advantage!
Step 1 in Developing Competences
• Develop ability to do something
– Select people with relevant skills/experience
– Broaden or expand individual abilities as needed
– Mold efforts and work products of

individuals into a cooperative effort
to create organizational ability
• As experience builds and company learns how to perform the

activity consistently well and at acceptable cost, the ability evolves
into a competence or capability
• Typically, a capability or competence emerges from establishing
and nurturing collaborative relationships between
– Individuals and groups in different departments and/or
– A company and its external allies
• If company masters the activity, performing it better than rivals,
the “capability” or “competence” becomes a
– Distinctive competence and
– Holds potential for

competitive advantage
This is the optimal outcome of the process of

building capabilities-competences!
Managing the Process of Building Competences:
Four Key Traits
1. Competencies are bundles of skills and know-how growing from combined

efforts of cross-functional departments
2. Normally, competences emerge incrementally from various company efforts
to respond to market conditions
3. Leveraging competences into competitive advantage requires concentrating
more effort and talent than rivals on strengthening competences to create
valuable capabilities
4. Sustaining competitive advantage requires adjusting competences to new
conditions
Approaches to
Developing Competences
• Internal development involves either
– Strengthening the company’s base of skills, knowledge, and intellect or
– Coordinating and networking the efforts
of various work groups and departments
• Partnering with key suppliers,
forming strategic alliances, or maybe
even outsourcing certain activities to
specialists
• Buying a company that has the required capabilities and integrating
these competences into the firm’s value chain
Building Competences:
Keys to Success
• Selecting capable employees • Empowerment
• Training • Attractive incentives
• Cultural influences and peer • Organizational flexibility
pressures
• Cross-department cooperation and • Short deadlines
collaboration • Good databases
• Motivating employees to strive for
operating excellence
Updating Competences and
Capabilities as Conditions Change
• Competences and capabilities must
continuously be modified and perhaps
even replaced with new ones due to
– New strategic requirements
– Evolving market conditions
– Changing customer expectations
• Ongoing efforts to keep core competences up-to-date can provide a basis
for sustaining both
– Effective strategy execution and
– Competitive advantage
When it is difficult to outstrategize rivals with a
superior strategy . . .
. . . Best avenue to industry

leadership is to out-compete rivals
with superior strategy execution!
Building competences and capabilities

rivals can’t match is one of the
best ways to out-compete them!
Strategic Role of
Employee Training
• Training plays a critical role in implementation when a firm shifts to a
strategy requiring different
– Skills or core competences
– Competitive capabilities
– Managerial approaches
– Operating methods
• Types of training approaches
– Internal “universities”
– Orientation sessions for new employees
– Tuition reimbursement programs
– Online training courses
Matching Organization
Structure to Strategy
• Few hard and fast rules for organizing
– One Big Rule: Role and purpose of organization structure is to support and facilitate
good strategy execution!
• Each firm’s structure is idiosyncratic, reflecting
– Prior arrangements and internal politics
– Executive judgments and preferences about how to arrange reporting relationships
– How best to integrate and coordinate work effort of different work groups and departments
CEO
Vice President Vice President Vice President

Step 1: Decide Which Value Chain Activities to Perform Internally and
Which to Outsource
• Involves deciding which activities are

essential to strategic success
– Most strategies entail certain crucial business processes or activities that must be
performed exceedingly well or in closely coordinated fashion if the strategy is
to be executed with real proficiency
• These processes/activities usually
need to be performed internally
– Other activities, such as routine
administrative housekeeping and Critical
some support functions, may be activities
candidates for outsourcing
Pinpointing Strategy-Critical Activities: Ask 2
Questions
1. What functions or business processes

have to be performed extra well or in
timely fashion to achieve competitive advantage?
2. In what value-chain activities would

poor execution seriously impair
strategic success?
Appeal of Outsourcing
• Outsourcing non-critical activities allows a firm to concentrate its

energies and resources on those value-chain activities where it
– Can create unique value
– Can be best in the industry
– Needs direct control to
• Build core competences
• Achieve competitive advantage
• Manage key customer-supplier-distributor relationships
Potential Advantages of Partnering
• By building, improving, and then leveraging partnerships, a firm
enhances its overall capabilities and builds resource strengths that
– Deliver value to customers
– Rivals can’t quite match
– Consequently pave the way
for competitive success
Partnering makes strategic sense when the

result is to enhance a company’s competences and
competitive capabilities.
Dangers of Outsourcing
• A company must guard against hollowing out its knowledge base and
capabilities
• Way to guard against pitfalls of outsourcing

– Avoid sourcing key components from a single supplier
– Use two or three suppliers to minimize

dependence on any one supplier
– Regularly evaluate suppliers
– Work closely with key suppliers

Step 2: Make Strategy-Critical
Activities the Main Building Blocks
• Assign managers of strategy-critical activities a visible, influential
position
• Avoid fragmenting responsibility for strategy-critical activities across

many departments
Assign
managers
• Provide coordinating linkages key roles
between related work groups
Primary Support
activities functions
– Meld into a valuable
competitive capability Strategic Coordi- Valuable
relation- nation capability
ships
Why Structure
Follows Strategy
• Changes in strategy typically require a new or modified organization structure
– A new strategy often involves different skills,
different key activities, and different staffing
and organizational requirements
– Hence, a new strategy signals a need to

reassess and often modify the organization
structure
• How work is structured is a means to an end –

not an end in itself!
Guard Against Functional
Designs That Fragment Activities
• Scattering pieces of critical business processes across several

specialized departments results in
– Many hand-offs which
• Lengthens completion time
• Increases coordination and overhead costs
• Increases risk of details falling
through the cracks
– Obsession with activity rather than result
• Solution  Business process reengineering
– Involves pulling strategy-critical processes from functional silos to create
process-complete departments or cross-functional work groups
Examples of Fragmented Strategy-Critical Activities
• Filling customer orders
• Speeding new products to market
• Improving product quality
• Supply chain management
• Building capability to conduct business via the Internet
• Obtaining feedback from customers, making product modifications to meet their needs
Step 3: Determine How Much
Authority to Delegate to Whom
• In a centralized structure
– Top managers retain authority
for most decisions
• In a decentralized structure
– Managers and employees are
empowered to make decisions
• Trend in most companies

– Shift from authoritarian to decentralized
structures stressing empowerment
Advantages of a Decentralized Structure
• Creates a more horizontal structure with fewer management layers
• Managers and employees develop their own answers and action plans
– Make decisions in their areas of responsibility
– Held accountable for results
• Shortens organizational response times and spurs
– New ideas
– Creative thinking and innovation
– Greater involvement of managers and employees
• Jobs can be defined more broadly
• Fewer managers are needed
• Electronic communication systems provide quick, direct access to data
• Genuine gains in morale and productivity
Maintaining Control in a Decentralized
Structure
• Place limits on authority empowered employees can exercise
• Hold people accountable for their decisions
• Institute compensation incentives that reward employees for doing

their jobs in a manner contributing to good company performance
• Create a corporate culture where

there’s strong peer pressure on
employees to act responsibly
Step 4: Provide for Internal
Cross-Unit Coordination
• Classic method of coordinating activities – Have related units report to
single manager
– Upper-level managers have clout to
coordinate efforts of their units
• Support activities should be
woven into structure to
– Maximize performance of primary activities
– Contain costs of support activities
• Formal reporting relationships often need to be supplemented to facilitate
coordination
Coordinating Mechanisms to Supplement the Basic Organization
Structure
• Cross-functional task forces
• Dual reporting relationships
• Informal networking
• Voluntary cooperation
• Incentive compensation tied
to group performance
• Teamwork and cross-
departmental cooperation
Step 5: Provide for
Collaboration With Outsiders
• Need multiple ties at multiple levels to ensure
– Communication
– Coordination and control
• Find ways to produce collaborative efforts to

enhance firm’s capabilities and resource strengths
• While collaborative relationships present opportunities, nothing valuable is realized

until the relationship develops into an engine for better organizational performance
Roles of Relationship Managers
With Strategic Partners
• Get right people together
• Promote good rapport
• See plans for specific activities

are developed and implemented
• Help adjust internal procedures

and communication systems to
– Iron out operating dissimilarities
– Nurture interpersonal ties

Perspectives on Organizing
• All basic organization designs have strategy-related strengths and weaknesses
• No ideal organization design exists
• To do a good job of matching
structure to strategy
– Pick a basic design
– Modify as needed
– Supplement with appropriate coordinating, networking, and communication mechanisms to
support effective execution of the strategy
Organizational Structures of
the Future: Overall Themes
• Revolutionary changes in how work is organized have been triggered by
– New strategic priorities
– Rapidly shifting competitive conditions
• Tools of organizational design include
– Empowered managers and workers
– Reengineered work processes
The future
– Self-directed work teams structure
– Rapid incorporation of Internet will be . . .
technology
– Networking with outsiders
Drawbacks of Centralized Authoritarian
Structures
• Centralized or authoritarian structures have often turned out to be a
liability where
– Customer preferences shift from
standardized to customized products
– Product life-cycles grow shorter
– Flexible manufacturing replaces
mass production
– Customers want to be treated as individuals
– Pace of technological change accelerates
– Market conditions are fluid
Characteristics of
Organizations of the Future
• Fewer barriers between
– Different vertical ranks
– Functions and disciplines
– Units in different geographic locations
– Company and its suppliers, distributors, Change &
strategic allies, and customers Learning
• Capacity for change and rapid learning
• Collaborative efforts among people in different
functions and geographic locations
• Extensive use of Internet technology
and e-commerce business practices
Strategic Control and Continuous
Improvement
• Establishing Strategic Controls
• Premise Control
• Strategic Surveillance
• Special Alert Control
• Implementation Control
• The Quality Imperative: Continuous Improvement to Build
Customer Value
What is Strategic Control?
Tracks a strategy as it is
implemented, detects problems or
changes in its underlying premises,
and makes necessary adjustments
Questions Involved in Assessing a Strategy’s
Success
1. Are we moving in the proper direction? Are our assumptions
about major trends and changes correct? Should we adjust or
abort the strategy?
2. How are we performing? Are objectives and schedules being

met? Are costs, revenues, and cash flows matching
projections? Do we need to make operational changes?
Four Types of Strategic Control
Strategic Surveillance
Premise Control
Special Alert Control
Implementation Control
Strategy Formulation Strategy Implementation

Time 1 Time 2 Time 3
Characteristics of the Four Types of Strategic
Control
Basic Characteristics Premise Control Implementation Strategic Special Alert
Control Surveillance Control
Objects of control Planning Key strategic thrusts Potential threats Occurrence of

premises and and milestones and opportunities recognizable but
projections related to the unlikely events
strategy
High Low High
Degree of focusing High
Data Acquisition:
Formalization
Medium Low High
Centralization High
Low Low High
Medium
Characteristics of the Four Types of Strategic
Control
Basic Characteristics Premise Control Implementation Strategic Special Alert
Control Surveillance Control
Use with:
Environmental factors Yes Seldom Yes Yes
Industry factors
Strategy-specific factors Yes Seldom Yes Yes
Company-specific No Yes Seldom Yes
factors
No Yes Seldom Seldom
Definitions of Strategic Controls
• Premise Control – Designed to check systematically and continuously
whether premises on which the strategy is based are still valid
• Strategic Surveillance – Designed to monitor a broad range of events inside
and outside the firm that are likely to affect the course of its strategy
• Special Alert Control – Thorough, and often rapid, reconsideration of the
firm’s strategy because of a sudden, unexpected event
• Implementation Control – Designed to assess whether the overall strategy
should be changed in light of the results associated with the incremental
actions that implement the overall strategy
Types of Implementation Control
Monitoring Milestone
strategic reviews
thrusts
Establishing Effective Operational Control
Systems
Set standards of performance
Measure actual Steps involved in Initiate corrective

post action control
performance systems action
Identify deviations from standards

set
Concepts Related to TQM
• Viewed as a new organizational culture and way of thinking

• Foundations of TQM
– Intense focus on customer satisfaction
– Accurate measurement of every critical variable in a business’s
operation
– Continuous improvement of products, services, and processes
– Work relationships based on trust and teamwork
Key Elements of Implementing TQM
• Define quality and customer • Adopt an error-free attitude

value • Get the facts first
• Develop a customer
• Encourage all levels of
orientation
employees to participate
• Focus on company’s business
processes • Create an atmosphere of total
• Develop customer and supplier involvement
partnerships • Strive for continuous
• Take a preventive approach improvement
The Value Chain Approach to Developing a
Customer Orientation
Input
External
Function External
suppliers Outputs
(like production) (ultimate)
Seeking: customer
Quality Outputs Other
Internal Input Efficiency internal
suppliers Responsiveness customers
(functions) (activities)
What is Six-Sigma?
A highly rigorous and analytical
approach to quality and continuous
improvement with an objective to
improve profits through deficit
reduction, yield improvement,
improved customer satisfaction and
best-in-class performance
Differences Between TQM and Six-Sigma
• Acute understanding of customers and the product or service

provided
• Emphasis on the science of statistics and measurement
• Meticulous and structured training development
• Strict and project-focused methodologies
• Reinforcement of the doctrine advocated by Juran such as top
management support and continuous education
ISO 9001
• The ISO 9001 standard focuses on achieving customer satisfaction through
• Continuous measurement
• Documentation
• Assessment
• Adjustment
• It specifies requirements where an organization
• Needs to demonstrate its ability to consistently provide product and services that meet
customer requirements
• Aims to enhance customer satisfaction through the effective application of the system,
including processes for continual improvement of the system and the assurance of
conformation to customer requirements
The Balanced Scorecard Methodology
• Intends to provide a clear prescription as to what companies should measure in

order to “balance” the financial perspective in implementation and control of
strategic plans
• It adapts the TQM ideas of customer-defined quality, continuous improvement,
employee empowerment, and measurement-based management/feedback into an
expanded methodology that includes traditional financial data and results
• Uses four perspectives: the learning and growth perspective, the business
process perspective, the customer perspective, and the financial perspective
Integrating Shareholder Value and
Organizational Activities Across
Organizational Levels Order Size
Customer Mix
Sales Sales/Account
Targets Customer Churn
Rate
Margin COGS/ Deficit Rates
Sales Cost Per Delivery
Dev. Cost/ Maintenance Cost
Shareholder Sales New Product Dev.
value creation ROCE Time
Inv.
Indirect/Direct Labor
Turnover
Customer
Cap. Complaints
Economic Capital Utilization Downtime
Profit Turnover
Accounts Payable
Cash Time
Turnover Accounts Receivable
Functional Time
CEO Corporate/Divisional Depts. and Teams
Balanced Score Card –A Strategy
Tool
Strategic Planning Model
ABCDE
Where we are Where we want to be How we will do it How are we doing
Assessment Baseline Components Down to Evaluate

Specifics
• Environmental • Situation – Past, • Mission & Vision • Performance • Performance

Scan Present and Measurement Management
Future
• Background • Significant Issues • Values / Guiding • Targets / Standards • Review Progress –
Information Principles of Performance Balanced Scorecard
• Situational • Align / Fit with • Major Goals • Initiatives and • Take Corrective
Analysis Capabilities Projects Actions
• SWOT – • Gaps • Specific • Action Plans • Feedback
Strength’s, Objectives upstream – revise
Weaknesses, plans
Opportunities,
Threats
The Balanced Scorecard and The Big Picture
•Activity Based Costing

•Economic Value Added
•Forecasting
Strategic •Benchmarking
Planning •Market Research
•Best Practices
Mission •Six Sigma
and •Statistical Process Control
Vision •Reengineering
Balanced •ISO 9000
Scorecard •Total Quality Management
•Empowerment
•Learning Organization
•Self-Directed Work Teams
•Change Management
Balanced Score Card
• Balanced Scorecard was first proposed by Dr.
Kaplan and Norton in 1992 and has since evolved
into a strategic planning tool.
• Many big corporations around the world have
adopted the Balanced Scorecard in its full scale
operation.
• Incidentally, Strategy Map is one of the tools used
within the concept of Balanced Scorecard.
• Using Balanced Scorecard concept is an effective
way to translate shareholder expectations into Key
Performance Indicators for an organization
• We will learn- How to use a Strategy Map to
translate an expectation from shareholder into a set
of key Performance Indicators
• We will learn-How to Strategy Maps as a
dashboard for performance monitoring and tracking
of the business performance for busy entrepreneur,
businessman or executive shareholders.
What is a Strategy Map?
• It is a process to translate strategy into strategic objectives in
the four perspective of Balanced Scorecard.
• Each of these Strategic objectives are required to be inter-
dependent with each other.
• To develop the inter-dependency of each of these objectives,
a commonly known “cause and effect “ relationship was
used to perform it.
• A well aligned strategic objectives should be well aligned for
a common goal i.e. supporting each others to achieve the
shareholder's expectations.
The four perspectives of Balanced Scorecard
are stated below:-
Balanced Scorecard, a method intended to give managers
a fast, comprehensive view of the performance of a
business via-
• Financial Perspective
• Customer Perspective
• Process Perspective
• Learning and Growth
• FINANCIALS PERSPECTIVES
– Financial indicators will vary from organization to organization but they are based on
the expectancy of the organization’s strategic objective.
– Examples: Revenue, Growth, Reductions, Margins, Profitability, Cash Flow, ROI,
Forecasts
• CUSTOMER PERSPECTIVES
– Identifies Customers, Markets, Value Proposition and Satisfaction
– Examples: Market Share, Retention, New Customers, Satisfaction Indexes, Customers
Profitability, Product/Service Attributes
• PROCESS(INTERNAL) PERSPECTIVES
– Internal Perspectives is the critical processes necessary for delivery of superior
performance in achieving financial measures.
– Examples: Project Performance, Reflections/Reworks, Cycle Times, Success Rates
• LEARNING AND GROWTH
– Identity and Resources of the Organizational Framework
– Examples: Staff Performance, Employee Satisfaction, Training
THE BALANCED SCORECARD
FINANCIAL/REGULATORY
CUSTOMER
To satisfy our constituents,
To achieve our vision,
what financial & regulatory
what customer needs must
objectives must
we serve?
we accomplish?
INTERNAL
To satisfy our customers and
stakeholders, in which business
processes must we excel?
LEARNING & GROWTH

To achieve our goals, how
must we learn, communicate
and grow?
Who should perform the Strategy Mapping?
• Ideally, it should be performed by the same group of people who did the Strategic
Planning Process.
• However, some CEO argue that since the Strategies are fixed, there is no need for
the CEO to be involved in developing the Key Performance Indicator (KPI) One of
the reasons for such a behavior is understandable because the CEO may already a
goal for his strategies.
• Hence, to him, doing a Strategic Map to develop the KPI is an academic exercise.
• In conclusion, you have to decided which path you want your team to take. If at all
you want to develop the Key Performance Indicators based on the four perspectives,
then you should learn how to perform the Strategy Map effectively.
Identifying Indicators of Organization
• Performance indicators differ from business drivers & aims (or goals). A School might
consider the failure rate of its students as a Key Performance Indicator which might help the
school understand its position in the educational community, whereas a Business might
consider the percentage of income from return customers as a potential KPI.
• But it is necessary for an organization to at least identify its KPIs. The key environments for
identifying KPIs are:
– Having a pre-defined business process (BP).
– Requirements for the business processes.
– Having a quantitative/qualitative measurement of the results and comparison with set goals.
– Investigating variances and tweaking processes or resources to achieve short-term goals
Marketing KPIs
(The following more or less describe
………what a bank /service sectors would do?

1. Customer related numbers:
– New customers acquired
– Status of existing customers
– Customer attrition
1. Turnover generated by segments of the customers - these could be demographic filters.
2. Outstanding balances held by segments of customers and terms of payment - these could
be demographic filters.
3. Collection of bad debts within customer relationships.
4. Demographic analysis of individuals (potential customers) applying to become
customers, and the levels of approval, rejections and pending numbers.
5. Profitability of customers by demographic segments and segmentation of customers by
profitability.
Categorization of indicators
• Key Performance Indicators define a set of values used to measure
against. These raw sets of values fed to systems to summarize information
against are called indicators. Indicators identifiable as possible candidates
for KPIs can be summarized into the following sub-categories:
– Quantitative indicators which can be presented as a number.
– Practical indicators that interface with existing company processes.
– Directional indicators specifying whether an organization is getting better or not.
– Actionable indicators are sufficiently in an organization's control to effect
change.
– Financial indicators used in performance measurement
• Key Performance Indicators in practical terms and
strategy development means are objectives to be
targeted that will add the value to the business most
(most = KEY INDICATORS OF SUCCESS).
Thank You
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Strategic Management

• Evolution of Strategic Management

• Patterns of Strategy Development

• Competitive Scope and Value Chain

Focus Operation Resources Conception Performance Change

Concern Efficiency Risk Position Execution Renewal

Budgeting & Long Range

Phase-I Phase-II Phase-III Phase-IV Phase-V

Oxford Pocket Dictionary

STRATEGY IS A WAY COMPANY AIMS TO IMPROVE ITS

It defines “what we want to achieve” & chart out course of action, to

Strategy is a set of Key decisions made to meet Objectives.

strategic competitiveness and above normal returns

A planning architecture is an overview of how different planning

Scan Internal Environment

-(Meeting annual budgets) • Forecasting-based Planning

-(Incorporating predictions beyond next year)

• Externally Oriented Planning • Strategic Management

-(Thinking strategically, Strategic • -(Considering also the implementation &

• How has the strategy field developed?

Budgetary Corporate Positioning Competitive Strategic

Financial Planning Selecting Focusing on Reconciling

Capital Forecasting. Industry analysis Resources & Cooperative

Coordination Corporate Diversification. Restructuring. Alliances &

John Dunning – IB Strategy

C K Prahalad – Inclusive Strategy

Sumantra Ghoshal – Problems in T.C.E.

Birth of strategic management

originated in the 1950s and 60s

 Alfred D. Chandler, Jr.,

 Strategy and Structure

 Organization's internal factors with external

product development strategies

market development strategies

horizontal and vertical integration

 stressed the importance of objectives

 management by objectives (MBO)

 Profit Impact of Marketing Strategies (PIMS)

 effect of market share

 "PIMS provides compelling quantitative evidence as to which business strategies

• Higher employee morale, dedication, and loyalty;

• Lower cost structure, including wages;

• Effective government industrial policy;

• Modernization after WWII leading to high capital intensity and productivity;

• Economies of scale associated with increased exporting;

Strategy, Structure, Systems, Skills, Staff, Style, and Supra-

 The Mind of the Strategist was released in America by

 Tom Peters -In Search of Excellence

 Dave Packard and Bill Hewlett devised an active management style

• Business War Games by Barrie James, 1984

Philip Kotler was a well-known proponent of marketing warfare strategy

• Offensive marketing warfare strategies

In 1968, Peter Drucker (1969) coined the phrase Age of Discontinuity

In 2000, Gary Hamel discussed strategic decay

In 1978, Abell, D. described strategic windows and stressed the

Henry Mintzberg (1988) – Strategy was much more fluid and

• Strategy as ploy - a maneuver intended to outwit a competitor

• Strategy as pattern - a consistent pattern of past behaviour - realized rather than

• Strategy as position - locating of brands, products, or companies within the

• Strategy as perspective - strategy determined primarily by a master strategist

• People can continuously expand their capacity to learn and be productive

• New patterns of thinking are nurtured