INTRODUCTION TO STRATEGIC MANAGEMENT

Without a strategy the organization is like a ship without a rudder.

Joel Ross and Michael Kami

Lesson One

Dr. Pradeep Dharmadasa, Department of Marketing , Faculty of Management and Finance, University of Colombo

Strategic Management - Roadmap

Strategy and strategic management Strategic priorities at corporate, business and operational level Strategic management model Need of strategic management Strategic management process

Strategic Management
Managements need to Grow the business Attract and please customers Compete successfully Conduct operations Achieve target levels of organizational performance

Strategy
What is strategy Literature on strategy goes back to the mid 1960s. Writings on military strategy go back much further Sun Tzu wrote his book Art of War in about the fourth centaury B.C.

Looking at Strategic Management Past

Strategys military roots
Origin of the word is Greek referring to military commander Historical references to the design of plans and actions to gain an edge on the enemy The concept involves analyzing the situation and effecting an appropriate response

Principles of War

Nine principles taught by leading military academies that can be used in business to develop strategies
Objective: every operation should be directed to a clearly defined, decisive, and attainable objective Offensive: seize, retain, and exploit the initiative Unity of command: forces must be under one commander with full authority and responsibility Mass: concentrate combat power at the decisive place and time

Principles of War
Economy of force: allocate on the essential minimum of forces to secondary efforts Maneuver: place the enemy in a position of disadvantage through the flexible application of combat power Surprise: strike at the enemy at a time or place that is unexpected Security: never allow an enemy to acquire an unexpected advantage Simplicity: need clear plans and concise orders

Academic Influences in Strategy

1911 Scientific management (Taylor) Still in place today, some consider it micromanaging HBS requires a class in Business Policy in 1912 Adam Smiths invisible hand (the market) gives way to Alfred Sloan (GM CEO from 1923-1946) concept of the visible handmiddle manager Chester Bernard influential book The Executive argues that managers should pay attention to strategic factors Ronald Coases 1937 article why firms exist (Nobel Prize in economics) and Joseph Schumpters concept of disruptive technologies written in 1942 bring in organizational economics Max Weber warns against bureaucratic organizations but sees a shift toward this way of organizing

Strategy as a Subject of Study

1960s 60/70s 1980s Harvard case study Corporate planning Adaptive processes (Quinn) Market positioning (Porter) Resource based theory (Hamel, Prahalad, Barney) Firms as organisms (Eisenhardt, Stacey) What would you do if you were CEO? Systematised and analytical approach Complexity and uncertainty. Influence of experience, politics, culture, history Assessing competitive forces (5 forces) and positioning

1980s

1980s

Unique resources, core competences

1990s

Innovation to deal with change

Recent Influences in Strategy

1960s (Strategy and structure; Corporate Strategy)

1963 Harvard business conference leads to SWOT analysis BCG founded in 1963 strategy boutique

Created the portfolio analysis Stars, dogs, cash cows, question marks

1980s (Porters 5 forces) 1990s (Resource based view of the firm) 2000s Knowledge based view

Three Big Strategic Questions

Whats the companys present situation?

Where does the company need to go from here?
Business(es) to be in and market positions to stake out
Buyer needs and groups to serve Direction to head

How should it get there?

A companys answer to how will we get there? is its strategy

Schools of Thought
School View Strategy formulation

Design
Planning Positioning Entrepreneurial

... as a process of conception

... as a formal process ... as an analytical process ... as a visionary process

Cognitive
Learning Power Cultural Environmental

... as a mental process

... as an emergent process ... as a process of negotiation ... as a collective process ... as a reactive process

Configuration

... as a transformation

Five Ps for Strategy

Definition As a plan Description Strategies are made in advance of the action to which they apply

Strategies are developed deliberately and purposefully. As a ploy A specific manoeuvre intended to outwit an opponent or competitor. Strategy is consistency in behaviour over time, whether or not intended.

As a pattern

Five Ps for Strategy

Definition
As a position

Description Strategy is the creation of a unique and valuable position, involving a different set of activities.

Strategy looks in to the grand vision of As a perspective enterprise and its content consisting of the heads of strategists

Five Definitions, Ten schools

Plan in the planning school
Position in the positioning school

Perspective in the entrepreneurial school

Pattern in the learning school Ploy in the power school

Definition of Strategy

Definition ,,,,,

Strategy is the direction and scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations.
Strategy: A firms theory about how to gain competitive advantages

Definition.

Strategy is the determination of basic long term goals of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals (Chandler, 1962, p.13).

Chandler, A.D. (1962). Strategy and structure, Cambridge, MA: MIT Press

Strategic Decisions

Strategy
Involves

an organisations goals Engages goal directed action Includes a series of related decisions and actions throughout the various levels and divisions of an organization Takes into account organizational internal strengths (resources and capabilities) and external opportunities and threats

The Hows That Define a Firm's Strategy

How to grow the business How to please customers How to outcompete rivals How to manage each functional piece of the business (R&D, production, marketing, HR, finance, and so on) How to respond to changing market conditions How to achieve targeted levels of performance
Strategy is HOW to . . .

A Powerful Strategy Leads to Sustainable Competitive Advantage

A company achieves sustainable competitive advantage when an attractive number or buyers prefer its products/services over those of rivals and when the basis for this preference can be maintained over time

Its nice when a strategy produces a temporary competitive edge but a durable edge over rivals greatly enhances a companys prospects for winning in the marketplace and realizing above-average profits

Types of Strategies

Types of Strategies
Strategy Intended Meaning Planned strategy for the future that an organisation develops on the basis of a series of analysis Strategy that evolves (that is, it is not planned) in an organisation on the basis of actions that the organisation takes in reaction to external and internal pressures

Emergent

Realised

Strategy that is implemented. It may be a combination of intended and emergent strategies

Intended Strategy
Mission and goals

External analysis

Strategic choice

Internal analysis

Intended Strategy

Organising for
implementation

Emergent Strategy
External analysis Mission and goals Internal analysis

Strategic choice. Does it fit ?

Emergent Strategy

Organisational grassroots

Types of Strategies ..further

Strategy Major Features

Planned

Strategies originate in formal plans: precise intentions exist, formulated and articulated by central leadership, backed up by formal controls to ensure surprise-free implementation in benign, controllable or predictable environment; strategies most deliberate

Entrepreneurial

Strategies originate in central vision: intentions exist as personal, unarticulated vision of single leader, and so adaptable to new opportunities; organisation under personal control of leader and located in protected niche in environment; strategies relatively deliberate but can emerge

Types of Strategies
Strategy Major Features
Strategies originate in shared beliefs: intentions exist as collective vision of all actors, in inspirational form and relatively immutable, controlled normatively through indoctrination and/or socialization; organisation often proactive vis-a-vis environment; strategies rather deliberate

Ideological

Umbrella

Strategies originate in constraints: leadership, in partial control of organizational actions, defines strategic boundaries or targets within which other actors respond to own forces or to complex, perhaps also unpredictable environment; strategies partly deliberate, partly emergent and deliberately emergent

Types of Strategies ..
Strategy Major Features

Process

Strategies originate in process: leadership controls process aspects of strategy (hiring, structure, etc.), leaving content aspects to other actors; strategies partly deliberate, partly emergent (and, again, deliberately emergent)

Strategies originate in enclaves: actor(s) loosely coupled to rest of organisation produce(s) patterns in Unconnected own actions in absence of, or in direct contradiction to, central or common intentions; strategies organizationally emergent whether or not deliberate for actors

Types of Strategies
Strategy Major Features
Strategies originate in consensus: through mutual adjustment, actors converge on patterns that become pervasive in absence of central or common intentions; strategies rather emergent

Consensus

Imposed

Strategies originate in environment: environment dictates patterns in actions either through direct imposition or through implicitly pre-empting or bounding organizational choice; strategies most emergent, although may be internalized by organization and made deliberate

Strategy

Strategy is managements game plan to

Attract and please customers

Stake out a market position

Conduct operations

Compete successfully
Achieve organizational objectives

Why Are Strategies Needed?

To proactively shape how a companys business will be conducted

To mold the independent actions and decisions of managers and employees into a coordinated, companywide game plan

Strategies for Better and for Worse

Dimensions Strategy sets directions Strategy focuses effort Strategy defines the organisation Advantages Provides directions Disadvantages Serves as a set of blinders to hide potential dangers

Promotes coordination of No open to other activity possibilities Provides people with a shorthand way to understand their organisation Define the organisation too simply Misinterpreting and distorting effect

Strategy provides Reduces ambiguity and consistency provides order

The Strategic Management Process

External Analysis Strategic Choice

Mission

Objectives

Strategy Implementation

Competitive Advantage

Internal Analysis

STRATEGIC MANAGEMENT MODEL

FEEDBACK
Perform external audit to identify key opportunities and threats

Establish Long-term objectives

Establish annul objectives

Identify Current Mision, Objectives And Strategies

Revise the business mission

Allocate resources

Measure and evaluate performance

Perform internal audit to identify key strengths and weaknesses

FEEDBACK

Select strategies to pursue

Devise policies

STRATEGY FORMULATION

STRATEGY IMPLEMENTATION

CONTROL & EVALUATION

The Basic Activities of Strategic Management

Levels of Strategy

Corporate level

Determine overall scope of the organisation

Add value to the different business units

Meet expectations of stakeholders How to compete successfully in particular markets How different parts of organisation deliver strategy

Business level (SBU)

Operational

Strategic Business Unit (SBU)

A strategic business unit (SBU) is a part of an organisation for which there is a distinct external market for goods or services that is different from another SBU

Business Strategy Diamond

Arenas

Where will we be active? ( and with

how much emphasis?) Which product categories? Which channels? Which market segments? Which geographic areas? Which core technologies Which value-creation strategies? Vehicles

Arenas

Staging

What will be our speed and

sequence of moves? Speed of expansion? Sequence of initiatives Economic logic

Staging

Economic logic

Vehicles

How will we get there?

Internal development? Joint ventures? Licensing/franchising? Experimentation? Acquisitions?

How will returns be obtained?

Lowest costs through scale advantages? Lowest costs through scope and replication advantages Premium prices due to unmatchable service? Premium prices due to proprietary product features?

Differentiators Differentiators

How will we win?

Image? Customization? Price? Styling? Product reliability? Speed to market?

39

The Vocabulary of Strategy

Mission overriding purpose Vision/strategic intent desired future state Goal general statement of aim or purpose Objective quantification or more precise statement of goal Strategic capability resources, activities and processes Business model how product, service and information flow Control monitoring of action steps

Strategy and Operations

Strategic Management Organisation-wide, holistic Conceptualisation of issues Operational Management Routinised Techniques and actions

Creating new directions

Managing existing resources

Developing new resources

Ambiguous/uncertain Long term

Operating within existing strategy

Operationally specific Day to day issues

Elements of Strategic Management

Understanding the strategic position of an organisation Making strategic choices for the future Turning strategy into action

Strategic Position

The Organisations Environment

Political Economic Social Technological Environmental Legal Sources of Competition Opportunities and Threats

Strategic Capability of the Organisation

Resources and Competences Strengths and Weaknesses

Strategic Position
Expectations and Purposes
Corporate Governance, Stakeholders, Ethics and Culture Sources of Power and Influence Communication of Purpose: Mission and Objectives

Strategic Choices

Bases of competitive advantage at business level Scope of activities at corporate level

Portfolio Market spread, e.g. international Value added by corporate parent (parenting)

Directions and methods of development

Directions: Product/Market Methods: Internal/organic, M&A, strategic alliances

Strategy into Action

Structuring the organisation Marshalling resources (people, information, finance, technology) Managing change

Different Contexts for Strategy

Small Business
Single market. Limited product/service range. Competitive strategy. Strategic capability. Restricted funds. Diverse products/markets/businesses. Structure/control/parenting. Competitive strategy. Portfolio management. Resource coordination.

Multinational Corporation

Manufacturing/ Service Organisations

Manufacturing physical product often augmented with service, brand image for competitive advantage. Services no physical product, competitive advantage based on intangibles

Different Contexts for Strategy

Ideology. Direct/indirect external influence (e.g. Public Sector government). Competition for resource inputs. Best value in outputs. Interagency cooperation

Voluntary and Not-forProfit

Diverse sources of funds. Values and ideology. Lobbying. Stakeholder management.

Strategic Management

Benefits of Strategic Management Long term orientation and fit between environment, strategy, structure and processes may lead to competitive advantage Challenges: Globalisation & E-Commerce Globalization Internationalistion of markets and corporations Markets: global than national markets Electronic Commerce Internet to conduct business transactions Basis for competition on a more strategic level rather than traditional focus on product features and costs

Strategy is needed because.

A companys strategy is a work in progress

Changes may be necessary to react to

Shifting market conditions

Technological breakthroughs Fresh moves of competitors Evolving customer preferences Emerging market opportunities

New ideas to improve strategy

Crisis situations

Strategy is needed because.

A compelling need exists for managers to proactively shape how a firms business will be conducted

A strategy-focused firm is more likely to be a strong bottom-line performer than one that views strategy as secondary

Strategic Analysis
SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats ), PEST Analysis (Political, Economic, Social, and Technological), STEER analysis (Socio- cultural, Technological, Economic, Ecological, and Regulatory factors), and EPISTEL (Environment, Political, Informatic, Social, Technological, Economic and Legal).

Environmental Scanning

Strategy Formulation

Mission Statement Setting Objectives & Goals A statement of purpose (strategic intent) committing the organisation to ambitious overarching (stretch) objectives. Provides a sense of direction and purpose. Drives strategic decision making and resource allocations. Forces the seeking of significant performance improvements to attain objectives

Objectives
Objectives are the end results of planned activity. They state what is to be accomplished by when and should be quantifiable if possible. The term goal is often used interchangeably with the term objectives. Goal is an open-ended statement of what one wants to accomplish with no justification of what is to be accomplished and no time criteria for competition.

Objectives

Specific results that an organization seeks to achieve.. Long-term objectives in pursuing its basic mission. Short-term objectives in order to achieve its long-term objectives

Objectives Specific Precise and understandable Measurable in order to confirm achievement Agreed with those responsible Realistic achievable Times deadline

Potential areas for objective setting

Product Productivity Market Profitability Research and innovation Human resources Financial resources physical resources

TYPES OF OBJECTIVES REQUIRED

Financial Objectives
Outcomes focused on improving financial performance

Strategic Objectives
Outcomes focused on improving competitive vitality and future business position

EXAMPLES: FINANCIAL OBJECTIVES

X % increase in annual revenues X % increase annually in after-tax profits X % increase annually in earnings per share Annual dividend increases of X % Profit margins of X % X % return on capital employed (ROCE) Increased shareholder value Strong bond and credit ratings Sufficient internal cash flows to fund 100% of new capital investment Stable earnings during periods of recession

EXAMPLES: STRATEGIC OBJECTIVES

Winning an X % market share Achieving lower overall costs than rivals Overtaking key competitors on product performance or quality or customer service Deriving X % of revenues from sale of new products introduced in past 5 years Achieving technological leadership Having better product selection than rivals Strengthening companys brand name appeal Having stronger national or global sales and distribution capabilities than rivals Consistently getting new or improved products to market ahead of rivals

Good Strategic Performance Is the Key to Better Financial Performance

Achieving good financial performance is not enough Current financial results are lagging indicators reflecting results of past decisions and actionsgood profitability now does not translate into stronger capability for delivering even better financial results later However, meeting or beating strategic performance targets signals Growing competitiveness Growing strength in the marketplace A company that is growing competitively stronger is developing the capability for better financial performance in the years ahead Good strategic performance is thus a leading indicator of a companys capability to deliver improved future financial performance

Strategy Formulation

Selecting Strategy

Corporate strategy (Stability, Growth, Retrenchment) Business strategy (Competitive, Cooperative) Functional strategy (Technological Leadership, Technological Followership) Guidelines for decision making that links formulation to implementation

Defining Policies

Strategy Implementation

Evaluation & Control

Evaluation and control is the process in which corporate activities and performance results are monitored so that actual performance can be compared with desired performance

Strategy Matters..

Strategy is often the difference between

success and failure, between mediocrity and excellence

a great manager and average managers

uncertain through life and moving ahead with purpose

Strategy from Economic Perspective

ATC MC P

ATC MC D

MR Q Q
(D=MR=Price)

Thriving!

Surviving