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Evolution of Strategic Management
Global considerations impact virtually all strategic decisions.
± Geographical boundaries no longer define the limits of our imaginations. ± The survival of businesses hinges on the perception of others about your business. ± The success of St. Mgt depends upon the manager¶s degree of understanding of competitors, markets, prices, suppliers, distributors, governments, creditors, shareholders, and consumers on worldwide basis.
Evolution of Strategic Management
Technological Changes Electronic Commerce (e-commerce) has become a vital St. Mgt tool.
± Companies getting competitive advantage by using internet for direct selling and comm. with suppliers, customers, creditors, partners/shareholders, clients and competitors dispersed globally. ± E- Commerce allows firms to sell products, advertise, purchase supplies bypassing intermediaries, track inventory, eliminate paperwork and share information. ± E-commerce is reducing expense, time, distance and space in doing business thus giving better customer service, greater efficiency improved product and higher profitability.
± It has transferred power from businesses to individuals .Evolution of Strategic Management Internet and PCs are changing our lifestyle the way we interact with our families. friends neighbors etc. .may lead to regulation on consumers in future. ± Buyers can get best price and service by quickly scanning hundreds of vendor offerings. ± It promotes endless comparison shopping thus enabling consumers worldwide to band together to demand discounts.
± According to seventy four percent Americans in a survey. . ± Business to Business e-commerce is five time greater than consumer e-commerce. e-mail and e-toys have become integral part of everyday life worldwide. e-commerce. the Internet will change society more than telephone and television combined.Evolution of Strategic Management Internet has changed the economics of business in every single industry worldwide. ± Slogans and company¶s like e-Bay. e-Trade.
marketing. production /operations. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow. .Strategic Management Definition The art and science of formulating implementing and evaluating cross-functional decisions that enable an organization to achieve it¶s objectives. research and development. finance/ accounting. and computer information systems to achieve organizational objectives. It focuses on integrating management.
systematic approach for making major decisions in an organization. ± Strategy implementation. It attempts to organize qualitative and quantitative information in a way that allows effective decision making under uncertainty. ± Strategy formulation. . Three stages of Strategic Management Process. logical. Strategy Formulation Developing a vision and mission.Strategic Management Process Strategic Management Process It is an objective. establishing long term objectives. generating alternative strategies and choosing particular strategy to pursue. identifying an organization¶s external opportunities and threats. ± Strategy evaluation. determining internal strengths and weaknesses.
The first choice is the best choice. .Strategic Management Process Vision Statement What do we want to become? A vision statement of an eye clinic. ³ Our vision is to take care of your vision´ A vision statement of Atlanta Web Printers. and being the best is what Atlanta Web pledges to work hard at being ± every day. ³ To be the first choice in the printed communication business.
Strategic Management Process Mission Statement An enduring statement of purpose that distinguishes one organization from other similar enterprise. . .it is a declaration of an organization¶s ³ reason for being ³answering the pivotal question ³ what is our business´. A clear mission statement is essential for effectively establishing objectives and formulating strategies.
Facilitate the translation of objectives in to work structure involving the assignment of tasks to responsible elements in organization. for allocating organizational resources. Establish a general tone or organizational climate. Provide a basis. Specify organization¶s purpose and then translate these into objectives in such a way that cost. time and performance parameters can be assessed and controlled. .Strategic Management Process Importance of Vision and Mission Statements Ensure unanimity of purpose within the organization. or standard.
Firms to formulate strategies to take advantage of external opportunities and to avoid/reduce the impact of external threats.Strategic Management Process External Opportunities and Threats The trends and events that could significantly benefit or harm an organization in the future are referred to external opportunities and threats like economic. demographic. technological or competitive trends. They are largely beyond the control of a single organization-thus the word external. social. environmental. governmental. . legal. cultural. political.
marketing. production/ operations. .Strategic Management Process Internal Strengths and weaknesses An organization¶s controllable activities that are performed especially well or poorly. They arise in the management. Organizations strive to pursue strategies that capitalize on Internal strengths and eliminate internal weaknesses. research and development and management information system activities of a business. finance/accounting.
production efficiency. advertising effectiveness and customer loyalty. . Internal factors can be determined by computing ratios. measuring performance and comparing to past periods and industry averages. Survey method could be used to determine employee morale. Strengths and weaknesses can be determined by elements of being rather than performance. Strengths and weaknesses can be determined relative to a firm¶s own objectives.Strategic Management Process Strengths and weaknesses are determined relative to competitors.
focus coordination and provide a basis for effective planning. reasonable and clear. reveal priorities. consistent. measurable. Objectives state direction. create synergy. Objectives should be challenging. aid in evaluation.Strategic Management Process Long Term Objectives Specific results that an organization seeks to achieve in pursuing its basic mission during a period of more than one year. organizing. . motivating and controlling activities.
Strategies are potential actions thus future. acquisition. liquidation and joint venture. diversification. market penetration. Business strategies may include geographic expansion. retrenchment. .Strategic Management Process Strategy It is the means by which long-term objectives can be achieved.oriented having multifunctional or multidivisional consequences for the organization. product development.
Strategic Management Process Strategy formulation issues Deciding what new business to enter What businesses to close. Whether to expand operations or diversify. Whether to enter international market. Whether to merge or form a joint venture How to avoid a hostile takeover. . How to allocate resources.
Developing and utilizing information systems. It entails establishment of annual objectives. motivate employees. Redirecting marketing efforts.Strategic Management Process Strategy Implementation It is also called ³the action stage of strategic management´. and allocate resources so that formulated strategies can be executed. and Linking employee compensation to organizational performance . Developing a strategy-supporting culture Creating an effective organizational structure. devise policies. Strategy Implementation includes. Preparing budget.
focuses on effectiveness Strategy implementation .requires special motivation and leadership skills .focuses on efficiency Strategy formulation ± primarily an intellectual process Strategy implementation ± primarily an operational process strategy formulation . Strategy formulation ± positioning forces before the action Strategy implementation ± managing forces during the action Strategy formulation .requires good intuitive and analytical skills Strategy implementation .Strategic Management Process Implementing Strategies Strategy implementation is different than strategy formulation.
requires coordination among many individuals Strategy formulation .concepts and tools similar for small.varies substantially among different types and sizes of organizations . large. for profit or nonprofit organizations Strategy implementation .requires coordination among a few individuals Strategy implementation .Strategic Management Process Strategy formulation .
Three fundamental strategy evaluation activities are. ± Taking corrective actions.Strategic Management Process Strategy Evaluation It is the means for management to determine whether the strategy is working or otherwise. All strategies are subject to future modifications because of persistent changes in the external and internal environment of an organization. ± Measuring performance. Strategy evaluation is necessary because success today is no guarantee of success tomorrow . ± Review external and internal environment factors which are bases for current strategies.
Program A complex single-use plan consisting of a set of interrelated actions aimed at achieving a one-time major goal. Divide the course of action into steps.Strategic Planning Types of Plans Single use plan A plan designed to fit one-time situation. ± 3. managers. Establish and provide the sources necessary to complete each step. Determine the logical sequence of steps. Two common types of single-use plans are programs and projects. ± 2. . To develop a program. The plan becomes obsolete when its one-time goals have been achieved. Decide who will be responsible for each step. ± 4. ± 1.
for example. procedures. and ± 6. Project A single-use plan that is narrower in scope than a program and aimed at achieving a specific one-time goal. and rules. Projects integrate fewer activities and resources than programs and are often developed as subunits of programs. . Bhasha Dam project in the national program of provision of electricity to the whole country.Policy ± a standing plan that provides broad guidelines for directing managerial activities in pursuit of organizational goals . Prepare a schedule for implementation. Gauge the time needed to finish each step.Strategic Planning -5. Standing plans A plan for guiding management decisions and activities in situations that recur repeatedly. Three commonly used types of standing plans are policies.
Contingency Plans Alternative courses of actions to be followed if unforeseen environmental shifts occur.Strategic Planning ± Procedure ± a standing plan encompassing a series of detailed steps to be followed in particular recurring situation. ± Rule ± a standing plan specifying the circumstances in which certain activities can or cannot be performed. .
5 years Tactical Plans .3 years Operational Plans .1 year .Strategic Planning Levels of Planning Strategic Tactical Operational General Time Period Considered for Plans Strategic Plans .
functions) Operational Goals/ Plans (departments and units) .The Managerial Pyramid Mission Strategic Goals/ Plans (organization as a whole) Tactical Goals/ Plans (major divisions.
Who Does the Planning?
Small businesses: ± Entrepreneurs do most of the planning. Large firms: ± Traditional: A central corporate planning group works with top management and each division to solicit, challenge, and refine the company¶s plan. ± Current: Planning is decentralized and includes the firms¶ product and divisional managers, aided by small headquarters advisory groups.
How to Develop a Plan
1. 2. 3. 4. 5. 6. Set an objective. Evaluate the situation. Determine the procedures. Set a timetable. Assign responsibility. Check the plan for feasibility and cost
WELL CONCEIVED PLANS MUST HAVE
1.Resources 2.Methods 3.Tasks 4.Sequence 5.Individuals 6.Location 7.Deadlines 8.Stop points 9.Measurement
profitability and productivity. These firms generally exhibit superior long-term financial performance relative to their industry.Strategic Planning Benefits of Strategic Planning Financial Benefits Organizations using strategic management concepts are more profitable and successful than those who do not. Businesses show significant improvement in sales. High performing firms do systematic planning to prepare for future fluctuations in their external and internal environment. .
Strategic management enhances the problem-prevention capabilities of organizations because it promotes interaction among managers at all divisional and functional levels. Enhanced awareness of external threats An improved understanding of competitors¶ strategies. . Reduced resistance to change. Increased employee productivity.Strategic Planning Nonfinancial Benefits Strategic management offers. Clear understanding of performance-reward relationships.
Provides a basis for clarifying individual responsibilities. and provides a unifying framework. Creates a framework for internal communication among personnel.Strategic Planning Benefits of Strategic Planning Allows for identification. prioritization and exploitation of opportunities. avoiding piecemeal decision making. Facilitates managerial control through setting of standards for monitoring and measuring performance. Directs decision making to support established objectives. Encourages forward thinking. . Presents a framework for improved coordination and control of activities. Allows more effective allocation of time and resources to identified opportunities. Helps integrate the behavior of individuals into a total effort.
Strategic Planning Reasons For No Strategic Planning By Firms Poor reward structure ± often fail to reward success but ready to punish for failure. Content with success ± they think no need to plan because things are fine as they stand. Laziness ± may not want to put effort needed for planning. Too Expensive ± culturally opposed to spending resources. . ( time spent on planning is investment). Fire-fighting ± busy in crisis management and not finding time to plan. Waste of time ± see planning as waste of time since no marketable product is produced.
being overconfident or overestimating experience can bring failure Prior bad experience ± plans have been long. he/she sees anew plan as threat. cumbersome. of aptitude with new system or of their ability to take on new roles. Overconfidence ± as individuals amass experience. Fear of Unknown ± uncertain of abilities to learn new skills. Planning. Self-interest ± when some one has achieved status. or privilege through effectively using old system. can also be done badly. no risk of failure. like anything else. they may rely less on formal planning. there is some risk of failure. impractical. However whenever something worthwhile is attempted. . Honest difference of opinion ± sincerely believe the plan is wrong as they are watching the situation from different viewpoing. or inflexible.Strategic Planning Fear of failure ± not doing anything. However.
Types of Strategies Integration Strategies Intensive Strategies Diversification Strategies Defensive Strategies Michael Porter¶s Generic Strategies Strategy is choosing among the alternatives. you cant follow a combination strategy for too long. . Strategic planning involves ³choices that risk resources´ and ³tradeoffs that sacrifice opportunity´. According to Hansen and Smith.
± Franchising .costs and opportunities are spread across many individuals.Types of Strategies Integration Strategies Forward integration Backwind integration Horizontal integration Forward Integration Gaining ownership or increased control over distributors or retailers by. retail outlets . ± Opening company¶s stores. ± Establishing websites to sell products directly to consumers..
Availability of quality distributors is limited. Advantages of stable productions are high. unreliable or incapable of meeting the firms distribution needs. When the industry is growing and expected to continue growing. organizations can increase the predictability of the demand through forward integration. When organization has both the capital and human resources. firms having forward integration are availing competitive advantage.Types of Strategies Situations when forward integration may be an effective strategy. . Organizations present distributors are expensive. forward integration reduces organization¶s ability to diversify if it¶s basic industry falters. When profit margins for distributors or retailers are high. however.
Types of Strategies Backward Integration A strategy of seeking ownership or increased control of a firm¶s suppliers particularly in situations when firm¶s suppliers are unreliable. Firms increasingly use websites on backward integration opportunities. too costly or cannot meet firm¶s requirements Firms having global sources of supply opt for deintegration. Global competition is prompting firm¶s to reduce number of suppliers and to demand higher level of service and quality from selected ones. .
.Types of Strategies Situations when backward integration may be an effective strategy When present suppliers are expensive. When an organization competes in an industry that is growing rapidly. or incapable of meeting the firms needs. when the number of suppliers is small and the number of competitors is large. unreliable. When an organization has both capital and human resources to manage the new business of supplying its own raw material.
Types of Strategies Situations when backward integration may be an effective strategy (contd) When the advantages of stable prices are particularly important. When an organization needs to acquire a needed resource quickly. as organization can stabilize the cost of its raw materials and associated products through backward integration. tempting to invest into the venture. . When present supplies have high profit margin.
acquisitions and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies. . It is increasingly being used by the firms as growth strategy. Mergers. Mergers between direct competitors create efficiencies because of potential for eliminating duplicate facilities.Types of Strategies Horizontal Integration A strategy of seeking ownership of or increased control over a firm¶s competitors.
( not if competitors are doing poorly.Types of Strategies Situations when horizontal integration may be an effective strategy When an organization can gain a monopolistic characteristics without being challenged by the law (SECP). when a firm competes in a growing industry. and overall industry sales are declining. . When the firm has the necessary resources of capital and human talent to manage the expanded organization. When increased economies of scale provide major competitive advantage. when competitors are faltering due to lack of managerial expertise or a need for particular resources that an organization possesses.
. advertising expenditure. Market penetrations includes increasing number of salespersons. publicity efforts or offering extensive sales promotion items. Market Penetration Market Development Product Development Market Penetration This strategy seeks to increase market share for present product or services in present markets through greater marketing efforts.Types of Strategies Intensive Strategies Requires intensive effort from the firm to improve it¶s competitive position with existing products.
. Market shares of major competitors have been declining while total industry sales have been increasing. Increased economies of scale provide major competitive advantage.Types of Strategies Situations when market penetration may be an effective strategy Current markets are not saturated with a particular product or service. The usage rate of present customers could be increased significantly. The correlation between dollar sales and dollar marketing expenditure has been high.
Organization¶s basic industry is becoming global. New untapped or unsaturated markets exist. Organization has the necessary resources to expand operations. inexpensive and good quality channels of distribution are available. .Types of Strategies Market Development It involves introducing present products or services into new geographic areas. Organization is very successful at what it does. Situations when market development may be an effective strategy New. reliable. Organization has excess production capacity.
Organization competes in an industry that is characterized by rapid technological development. It normally entails large R & D expenditure. Situations when Product development may be an effective strategy Organization¶s successful product has reached the maturity stage and organization wants its customers to try it¶s new or improved product.Types of Strategies Product Development A strategy that seeks increased sales by improving or modifying present products or services. .
especially when the company is competing in an un attractive industry. Organization competes in a high-growth industry. There are three types of diversification strategies. Horizontal and conglomerate. . but related. products or services. Organization has strong research and development capabilities Diversification Strategies Diversification strategy is followed to avoid dependence on any single industry. Concentric. Concentric Diversification Acquiring new.Types of Strategies Major competitors offer better -quality products at comparable prices.
When adding new but related products would significantly enhance the sales of current products. When new related products have seasonal sales levels that counterbalance a company¶s existing peaks and lows. . When new related products could be offered at highly competitive prices.Types of Strategies Situations when Concentric diversification may be an effective strategy When an organization competes in a no-growth/ slowgrowth industry. When an organization has strong management team. When the company¶s products are in the declining stage of the product¶s life cycle.
Organization¶s present marketing channels can be used to market new products to current customers. The new product has countercyclical sales patterns compared to an organization¶s present products. unrelated products or services for present customers. Situation when Horizontal Diversifications may be an effective strategy. Organization competes in a highly competitive and / or a no growth industry yielding low returns and profit margins. . Revenue of the organization would increase significantly.Types of Strategies Horizontal Diversification Adding new.
.Types of Strategies Conglomerate Diversification Adding new. There exists financial synergy between the acquired and acquiring firms. unrelated products or services. Organization¶s basic industry is experiencing decline in sales / profits. The existing markets for company¶s present products are saturated. Situations when conglomerate diversification may be an effective strategy. Organization has the opportunity to purchase unrelated business providing an attractive investment opportunity. Antitrust action could be charged against an organization that has concentrated on a single industry. Organization has the capital and managerial talent to successfully compete in a new industry.
Types of Strategies Defensive Strategies Retrenchment. pruning product lines. Bankruptcy can be an effective type of retrenchment strategy. Entails selling off land and buildings to raise needed cash. Retrenchment An organization regroups through cost and asset reduction to reverse declining sales and profits. is designed to fortify an organization¶s basic distinctive competence. Also called a turnaround or reorganization strategy.. automating processes. closing marginal businesses. Divestiture and Liquidation are defensive strategies. reducing the number of employees and controlling expenses. closing obsolete factories. . allowing a firm to avoid major debt obligations and to void union contracts.
The organization is a weaker competitor in the industry. low profitability. Organization has grown so large so quickly that major internal reorganization is needed. and pressure from stakeholders to improve performance. The organization is plagued by inefficiency.Types of Strategies Situations when retrenchment may be an effective strategy. minimize external threats. An organization has failed to meet it¶s objectives and goals repeatedly overtime. take advantage of internal strengths and overcome internal weaknesses overtime. poor employee morale. . could not capitalize on external opportunities. The organization¶s strategic managers have failed.
.Types of Strategies Divestiture Selling a division or part of an organization. or that do not fit well with the firm¶s other activities. Divestiture can be apart of an overall retrenchment strategy to rid an organization of businesses that are unprofitable. The strategy is used to raise capital for further strategic acquisition or investments. that require too much capital.
A division needs more resources to be competitive than the company can provide. Government antitrust action threatens an organization . customers. The organization has pursued a retrenchment strategy but failed to accomplish needed improvements. values or needs. employees. managers. may be due to different markets. A division is misfit with the rest of an organization. A large amount of cash is required quickly and cannot be obtained from other sources.Types of Strategies Situations when Divestiture may be an effective strategy. A division is responsible for an organization¶s overall poor performance.
.Types of Strategies Liquidation Selling all of a company¶s assets. for their tangible worth is called liquidation. Organization has pursued both a retrenchment strategy and divestiture strategy and both have failed. When stockholders of a firm can minimize their losses by selling the organization¶s assets. can be an emotionally difficult strategy. Situations when liquidation may be an effective strategy to pursue. It is better to cease operating than to continue loosing large sums of money. in parts. Liquidities is a recognition of defeat and therefore. than liquidation is the only way to orderly get max cash from firm¶s assets. When only alternative left is bankruptcy.
Differentiation strategy aims at producing unique products for relatively price sensitive consumers and focus means producing products & services to fulfill the needs of small groups of consumers. . Large firms with greater resources compete on a cost leadership and or differentiation basis while small firms often compete on focus basis. cost leadership. Cost leadership emphasis on producing standardized products at a very low per unit cost for price sensitive consumers. These strategies imply different organizational arrangements. Strategies allow organizations to gain competitive advantage from three different bases. control procedures and incentive systems. Differentiation and focus.Types of Strategies Michael Porter¶s Generic Strategies.
Types of Strategies Cost Leadership Strategy Reason for forward. of buyers with significant bargaining power. It is an effective strategy in situations where customers are price sensitive. Pursue cost leadership in conjunction with differentiation. backward and horizontal integration is to gain cost leadership. buyer are not bothered about brands and there are large no. there is few ways of achieving product differentiation. . Perform cost-benefit analysis to evaluate ³sharing opportunities´ of resources and knowledge among firm¶s existing and potential business units.
technology break through make strategy ineffective. buyer¶s interest switching to other differentiating features beside price. lower overheads. . limited perks. rewards linked with cost containment.Types of Strategies Implies high efficiency. intolerance of waste. Competitors imitation of strategy may result in lowering overall Industry profits.
Special features could be superior service. Strategy requires strong coordination between R&D and marketing functions. Will allow a firm to charge high price. engineering design. spare parts availability. gain customer loyalty. . product performance. useful life.Types of Strategies Differentiation Strategy. Follow a strategy after careful study of buyers needs and preferences to determine and incorporation of one or more differentiations features. gas mileage or ease of use.
Market Penetration and Market Development strategies offer substantial focusing advantages. . geographic market. ± Consumers have distinctive preferences or requirements. Focus Strategies are most effective when.Types of Strategies Focus Strategies To concentrate on a particular group of customers. or on a particular product-line segments in order to serve a well defined but narrow market better than competitors who serve a broader market. ± Rival firms are not attempting to specialize in the same target market.
Types of Strategies Medium to large firms can pursue focus strategies only in conjunction with differentiation or cost leadership-based strategies. . The consumer preferences drifting towards the product attributes desired by the market as a whole. Risks of pursuing Focus Strategies. The possibility of many competitors recognizing the successful focus strategy and copying it.
Types of Strategies Means For Achieving Strategies Joint Venture / Partnership It is a popular strategy when two or more companies form a temporary partnership or consortium for the purpose of capitalizing on some opportunity. ± Cross-licensing agreements. ± Cross-distribution agreements. The sponsoring firms normally form a separate organization with shared ownership. ± Research and development partnerships. Other types of cooperative arrangements could be. .
. 3. 2. The venture may not be supported equally by both partners.Managers who must collaborate daily in operating the venture are not involved in forming or shaping the venture. problems arise. Common Problems Leading To Failure Of Joint Ventures 1.Types of Strategies ± Cross-manufacturing agreements.The venture may begin to compete more with one of the partners than the other. and ± Joint-bidding consortia. if supported unequally.
Takeover/Hostile Takeover . Friendly Merger .when a large organization purchases (acquires) a smaller firm.When a merger or acquisition is not desired by both parties.If the acquisition is desired by both firms. Acquisition. .Types of Strategies Merger / Acquisition Merger ± When two organizations of about equal size unite to form one enterprise. or vice versa.
Not all mergers are effective and successful ± about half produced negative returns to shareholders (Wall Street Journal studies) .Types of Strategies Forces driving Mergers/ Acquisitions Technological Change Excess capacity Inability to boost profits through price increases A depressed stock market Need to gain economies of scale Bargains galore as companies struggle and while stock prices are low.
To reduce tax obligations. To gain new technology. distributors. To gain economies of scale To smooth out seasonal trends in sales. To gain access to new suppliers.Types of Strategies Reasons for Mergers and Acquisitions To provide improved capacity utilization. . products and creditors. To make better use of the existing sales force. To reduce managerial staff. customers.
Types of Strategies
First Mover Advantages The benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firm is known as first mover advantages. It may include;
± Securing access to rare resources. ± Gaining new knowledge of key factors of issues, and ± Carving out market share and a position that is easy to defend and costly for rival firms to overtake.
Risk associated being first mover ± unexpected and unanticipated problems and costs may occur being the first firm doing business in the new market.
Types of Strategies
According to research, first mover advantages tend to be greatest when competitors are roughly the same size and possess similar resources. Otherwise, larger competitors can wait while others make initial investments and mistakes, and then respond with greater effectiveness and resources Out Sourcing Business Process Outsourcing (BPO) involves companies taking over the functional operations, such as human resource, information systems, payroll, accounting, customer service, and even marketing of other firms.
Types of Strategies
Companies choose to outsource because; It is less expensive, It allows the firms to focus on its core business, and It enables the firm to provide better service. BPO is the means for achieving strategies that are similar to partnering and joint venture.
The organizational environment consists of the internal environment and the external environment.Strategic Management Process The Organizational Environment All forces with potential to influence the organization and its performance is known as organizational environment. Within the external environment are the forces of the general environment or macro environment and the forces of the task environment or industry environment .
THE ENVIRONMENT The macro-environment Industry Operating Envrnmt Internal Environment The organization Task Environment .
Strategic Management Process Environmental Scanning Scan external environment to identify possible opportunities and threats. It is a tool used by corporations to avoid strategic surprise and to ensure long-term health . . evaluate and disseminate information from external and internal environment to the management. Thus. Scan Internal environment to ascertain strengths and weaknesses Monitor.
The IO theorist argue that the industry in which a firm competes has stronger influence on the firm¶s performance than the internal functional decisions managers make in marketing. and gain a full understanding of key external factors relationships within that industry. the external (industry) factors are more important than internal factors in a firm achieving competitive advantage.Strategic Management Process The Industrial Organization (IO) View According to IO approach. IO perspective requires the firms to compete in attractive industries. finance etc. . avoid weak or faltering industries. Competitive advantage is determined largely by competitive positioning within and industry.
structures. and operations. However. such as economies of scale. product differentiation. . and level of competitiveness than on internal resources.Strategic Management Process Firm performance is primarily based more on industry properties. barriers to market entry. whereas 36 percent of the profitability is attributed to the firm¶s internal factors. capabilities. Research findings suggest that approximately 20 percent of a firm¶s profitability can be explained by the industry.
Employees. Political. cultural. Communities. Technological forces. Trade Associations. Suppliers. Labor Unions. Services. Creditors. Stockholders. .Strategic Management Process Key External Forces: ± ± ± ± ± Economic forces. Markets and Natural Environment. Customers. demographic and environmental forces. Distributors. Governments. Special interest groups. Products. Social. Managers. Organization¶s Operating Environment: Competitors. governmental and legal forces. Competitive forces.
± The nature of positioning and market segmentation strategies. External forces directly effect both suppliers and distributors. External opportunities /threats enable organizations to develop clear missions and strategies to achieve their objectives. .Strategic Management Process The effects/influences of external environment on organizations operating environments give rise to opportunities and threats for the organization. ± The choice of businesses to acquire or sell. Changes in external forces is reflected into: ± Changes in consumer demand for both industrial and consumer products and services.
± Hierarchical effecting overall company and functional/ divisional areas. human resources and internet.Strategic Management Process Get the participation of max. ± Important for achieving long-term and annual objectives. ± Applicable to all competing firms. ± Measurable. Evaluate and assimilate the info. List of key external factors be communicated to all in the organization. number of managers and employees. to identify key external factors which are. Gather competitive intelligence about key external force¶s trends by using print/electronic media. .
. Consumption patterns are effected by the relative affluence of various market segments-the firm to consider economic trends in the segments that affect its industry. Interest rates. NAFTA. stock prices.Strategic Management Process Economic Forces The Nature and direction of economy in which firm operates. ± ± ± ± ± ± ± General availability of credit. OPEC. etc. The firm must consider. Low/ high value of dollar Gross domestic product trend Right sizing/ downsizing or derecruiting Deregulation of Industries to restrain inflation Emergence of economic blocs/ organizations like EEC. The level of disposable income.
Demographic and Environmental forces.Strategic Management Process Social. Cultural. services. markets and customers and all sorts of organizations. cultural. demographic and environmental factors have impact on virtually all products. Changes in social. and all industries are challenged by the opportunities and threats arising from these changes. .
(Golden hand shake) under Govt. Political. Companies have to pay heavy penalty in shape of expensive severance packages. governmental and legal factors can represent key opportunities or threats for both small and large organizations. state. subsidizers. rules for laying off employees . employers and customers of organizations. Governmental and Legal Forces Federal. local and foreign governments are major regulators.Strategic Management Process Political.
. Changes in tax rates. or markets for their products. facilities. Political forecasts is critical for multinational firms that depend on foreign countries for natural resources. import duty on raw materials. Mass communication and high technology is creating similar patterns of consumption in diverse cultures world wide. special tariffs can affect firms significantly. contracts. companies relying only on domestic market may find it difficult to survive. subsidies.Strategic Management Process Political forecast is vital part of external audit for industries/ firms depending on Govt.
Strategic Management Process Technological Forces Technological advances have brought revolution in business operations. Internet is saving companies billions of dollars in distribution and transaction from direct sales. . erasing limitations of traditional geographical markets. increasing speed of distribution . New positions of CIO and CTO are being introduced in companies to effectively capitalize on e-commerce. altering economies of scale and changing entry barriers. It is changing the nature of opportunities and threats by altering the life cycle of products.
distributors. services. ± Create shorter production runs. Technological breakthroughs can dramatically affect. ± Products. customers. ± Render existing products and services obsolete. manufacturing processes. ± Change values and expectations of employees. markets. suppliers. ± Create shortage in technical skills. managers and customers. . ± Create new more powerful competitive advantage. operations.Strategic Management Process Technological forces represent major opportunities and threats which should be taken care of while formulating strategies. marketing practices and competitive position. ± Change the relative cost position in an industry.
capabilities.Strategic Management Process Competitive Forces It is imperative in external audit to identify rival firms and determine their strengths. The most-successful purchases are in niches that add technology or a related market. ± People make a difference. ± Understanding and remembering precisely what is your business. threats. weaknesses. ± Bringing improvement. opportunities. tired of hearing it? Too bad. objectives and strategies. Characteristics of a competitive firm. ± Acquisition is essential to growth. Nothing quite recedes like success. . ± There is no substitute for quality and no greater threat than failing to be cost-effective on a global basis. not just in product but the whole company. ± Innovate or evaporate. ± Market share.
lower costs and better decision making. Good competitive intelligence in business is one of the key to success. Competitive intelligence is equally applicable for strategy formulation. implementation and evaluation decisions.Strategic Management Process Competitive Intelligence (CI) A systematic and ethical process for gathering and analyzing info about competitors activities and general business trends to further a business¶ own goals. . Benefits of corporate spying include increased revenues. Major competitor¶s weakness can represent external opportunity and major strength may represent key threat.
want ads. Identify areas in which competitors are vulnerable and assess the impact strategic actions would have on competitors.Strategic Management Process Objectives of Competitive Intelligence (CI) To provide general understanding of an industry and its competitors. customers. wiretapping. and computer break-ins should not be used in CI. creditors. employees. Sources of CI Internet. . trade journals. online interviews with celebrities and government filings. newspaper articles. Identify competitors potential moves that might endanger a firm¶s position in the market. distributors. suppliers. managers. Cooperation Among Competitors Unethical tactics like bribery.
Strategic Management Process Industry Environment Competitive Analysis: Porter¶s Five-Forces Model. the nature of competitiveness in a given industry can be viewed as a composite of five forces. Bargaining power of suppliers. . ± ± ± ± ± Rivalry among competing firms. According to Model. A widely used approach for developing strategies in many industries. Potential development of substitute products. Potential entry of new competitors. Bargaining Power of consumers.
Michael Porter¶s Model POTENTIAL ENTRANTS Threat of new entrants INDUSTRY COMPETITORS Bargaining power of suppliers SUPPLIERS Bargaining power of customers CUSTOMS Rivalry Among Existing Firms Threat of substitute products or services SUBSTITUTES .
Strategic Management Process Rivalry among Competing firms The most powerful of five Competitive forces. The intensity of rivalry increases. A successful strategy giving competitive advantage to a firm can be pursued by rival firms. ± By becoming more equal in size and capability. providing services. adding features. . ± with the increase in number of competitors. Change in strategy by one firm may be met with retaliating countermoves like lowering of prices. enhancing quality. extending warranties or increasing advertising.
. ± The industry becomes Inherently unattractive. ± When mergers and acquisitions are common in the industry.Strategic Management Process -With decrease in demand of industry¶s products. ± when product is perishable. _ Consumers can switch brands easily. ± Barriers to leaving the market are high. As rivalry among competing firms intensifies. ± When fixed costs are high. ± Industry¶s profits decline.
Barriers to entry include. undesirable locations. large capital requirement. increases the intensity of competitiveness among the firms. possession of patents. Economy of scale. counterattack by entrenched firms or potential saturation of the market: . regulatory policies. sophisticated technology and know how. lack of access to raw materials.Strategic Management Process Potential Entry of New Competitors Easy entry of a firm in an industry. strong brand preference. Govt. strong customer loyalty.
their strategies.Strategic Management Process New firms enter the industry with. ± lower prices. . ± High quality products. plan counter attack if required and capitalize on existing strengths and weaknesses. Strategist must identify new entrants. ± Substantial market resources.
paperboard. competitive pressure arise when price of the substitute product decreases or consumer¶s switching cost decreases. . like plastic container producer competing with glass. or aluminum can producer. Presence of substitute put ceiling on the price of a product. Competitive strength of the substitute product could be measured by its market share.Strategic Management Process Potential Development of Substitute Products Firms are in close competition with producers of substitute products. Or the firms plane for increased capacity and market penetration.
too costly or not capable of meeting a firm¶s demand on consistant bases. ± There is large number of suppliers. ± When cost of switching raw materials is high. Firms may pursue a backward integration strategy to gain control or ownership of suppliers.Strategic Management Process Bargaining Power of Suppliers It affects the intensity of competition in industry when. This strategy is effective when suppliers are unreliable. . ± There are only few substitute raw materials.
Consumers can negotiate selling price. ± Buy in volume. Rival firms offer extended warranties or special services to gain consumer loyalty.Strategic Management Process Bargaining Power of Consumers Intensity of competition in an industry increases by the bargaining power of consumers if. ± Consumers are concentrated or large. . ± Products being purchased are standard or undifferentiated. warranty coverage. and accessory packages.
governmental. and competitive information. cultural. The Matrix can be developed in five steps. by writing opportunities first and than threats. political. social. technological. . environmental. legal.Strategic Management Process The External Factor Evaluation (EFE) Matrix The matrix allows the strategists to summarize and evaluate economic. demographic. ± i) List external factors identified in external audit (about 10 to 20 factors) including both opportunities and threats.
0 (very important). and 1 = the response is poor. The weight indicates the relative importance of that factor in success of the firm¶s industry. . Appropriate weight can be determined by comparing successful with unsuccessful competitors or by discussing the factor and reaching a group consensus. The total of all weight assigned to the factors must be equal 1.0 (not important) to 1.Strategic Management Process ± ii) Assign each factor a weight ranging from 0.0. 2 = the response is average. where. 4 = the response is superior. 3 = the response is above average. ± iii) Assign a rating of 1 to 4 to each key external factor to indicate how effectively the firm¶s current strategies respond to the factor.
The highest possible total weighted score for an organization is 4.0 and the lowest 1.5. ± iv) Multiply each factor¶s weight by its rating to determine a weighted score.0. .Strategic Management Process Ratings are based on effectiveness of the firm¶s strategies thus company-based. The score of 4. or taking advantage of opportunities and minimizing effects of threats. whereas the weights in step 2 are industry based. The average total weighted score is 2.0 indicates that the organization is responding in an outstanding way to existing opportunities and threats in its industry. ± v) Sum the weighted score for each variable to determine the total weighted score for the organization.
15 .15 .40 .60 .15 .15 .15 .05 .Strategic Management Process A SAMPLE INTERNAL FACTOR EVALUATON MARTRIX Key Internal Factors Internal Strength Largest Casino in country Room Occupancy 95% in L.05 .V Increasing free cash flow Owns one mile on beach Strong management team Buffet at most facilities Long-range planning Reputation as family friendly Financial ratios Weight Rating Weighted Score .05 .15 .05 4 4 3 4 3 3 4 3 3 .10 .20 .05 .05 .20 .05 .
V Little diversification Family reputation.75 .10 .05 .10 1.05 .05 .10 .00 1 2 2 1 .Strategic Management Process Key Internal Factors Internal Weaknesses Most properties located in L. not high Recent loss of joint venture Total Weight Rating Weighted Score .05 .10 2.
However. where. ± 4 = major strength ± 3 = minor strength ± 2 = minor weakness ± 1 = major weakness .Strategic Management Process The Competitive Profile Matrix (CPM) The CPM identifies a firm¶s major competitors and its particular strengths and weaknesses in relation to a competitor firm¶s strategic position. therefore the ratings refer to strengths and weaknesses. The weights and total weighted scores in both a CPM and EFE have the same meaning. Critical success factors in a CPM include both internal and external issues.
location of facilities. breadth of product line. could be. price competitiveness. proprietary or patent advantages. effectiveness of sales distribution. Other than critical success factors. technological advantages and e-commerce expertise. product quality. management. financial position customer loyalty.Strategic Management Process For example critical success factors for firms may include advertising. union relations. experience. global expansion and market share. production capacity and efficiency. .
Three critical ingredients of a successful strategy. provide the basis for establishing objectives and strategies. Involvement of representatives of managers and employees from throughout the firm to determine firm¶s internal strengths and weaknesses .Strategic Management Process Internal Environment Analysis The Importance of Internal Analysis Internal strengths/ weaknesses coupled with external opportunities/threats and a clear statement of mission. ± Strategy to place realistic requirements on the firm¶s resources. ± Strategy be carefully executed. ± Strategy be consistent with conditions in competitive environment.
and organizational resources. raw materials and machines. The organizational performance will primarily be determined by internal resources. Three Basic Resources Physical resources. . location.Strategic Management Process The Resource-Based View (RBV) According to RBV approach. Physical Resources Plant and equipment. internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage. which can be grouped into three categories. human resources. technology.
and abilities Organizational Resources Firm structure. copyrights. The firm must consider the mix. type. and nature of a firm¶s internal resources first in devising strategies that can lead to sustainable competitive advantage. . databases. knowledge. training.Strategic Management Process Human Resources All employees. amount. experience. accumulated experience within organization and so on. RBV theory asserts that sources are actually what helps a firm exploit opportunities and neutralize threat. skills. planning processes. information systems. intelligence. trademarks. patents.
nurtured and deployed throughout the firm. Core Competence A capability or skill running through a firm¶s businesses and that once identified. people. either with greater efficiency in the processes or greater quality in the output or both. and processes that a company uses to transform inputs into outputs. abilities and ways of combining assets. becomes the basis for lasting competitive advantage. . Finely developed capabilities can be a source of sustained competitive advantage.Strategic Management Process Organizational Abilities The skills. They enable the firm to take the same input factors as rivals and convert them into products and services.
. ± Commodities. ± Cash. Easy to imitate. competitors will match or better any resource sooner than later.Strategic Management Process What Makes a Resource valuable? Competitive Superiority : Does the resource help fulfill a customer¶s needs better than those of the firm¶s competitors? Resource scarcity: Is the resource in short supply? Inimitability: Is the resource easily copied or acquired? Inimitability doesn¶t last for ever.
± Patents. ± capacity ± Economy of scale Difficult to Imitate ± Brand loyalty. Cannot be Imitated. . ± Employee Satisfaction. ± Unique assets (mineral rights). ± Reputation for fairness. ± Unique locations.Strategic Management Process Can be imitated (but may not be).
Strategic Management Process Durability: How rapidly will the resource depreciate? Substitutability: Are other alternatives available? Using Resource. Involves identifying and evaluating firm¶s resources that possess strategic value and can provide basis for future competitive advantage. .Based View in Internal Analysis.
Look at organizational processes and combinations of resources and not only at isolated assets or capabilities. Separating tangible and intangible assets as well as organizational capabilities can uncover value-building resources and activities. . Use value chain approach to identify capabilities. Utilize a functional perspective. activities and processes having potential competitive advantage.Strategic Management Process Methods to identify resources with strategic value. Disaggregate resources: Break them into more specific competencies rather than stay with broad categorizations.
color scheme. floor materials. Providing ease of access ± Parking (where appropriate). Theme. ± Bar positioning. ± Features/décor.Strategic Management Process Disaggregating a Restaurant¶s Customer Service Resource. window decorations ± Table layout Table materials . ± External Signs/ welcome Offering a delightful ambiance ± Floor design. ± Door Positioning and style.
. ± Entertainment for queuers. ± Visible queuing system.Strategic Management Process Providing a Special welcome ± Host greeting ± Welcome drinks/ eats ± Menu introduction ± Table decoration Ensuing waiting time at the table is´ as expected´ and as enjoyable as possible. ± Marketing literature.
Menu training.Strategic Management Process Providing a customer with delightful service Developing a special relationship between waiter/ waitress and table ± Waiter selection ± waiter training/ development Personality training Assessing customers Handling disasters Coping with pressures. ± System of gaining waiter¶s attention . coaching process Discipline system. Job experience Motivation awards. Daily Meetings.
. ± Kitchen queuing system ± Service standards Reducing the pain of paying the bill.Strategic Management Process Ensuring that Menu is fun to use and caters to the diners¶ needs. ± Size of Menu ± Material Menus made off ± Menu dishes ± Menu layout Providing speed of service appropriate to the occasion.
and heroines. rituals. stories. .Strategic Management Process Organizational Culture A pattern of behavior (that has been) developed by an organization as it learns to cope with its problem of external adaptation and internal integration. and that has worked well enough to be considered valid and to be taught to new members as the correct way to perceive. legends. rites. saga. thing. This definition emphasizes the importance of matching external with internal factors in making strategic choices. Cultural products or dimensions include values. heroes. language. ceremonies. and feel. beliefs. metaphors. myths. symbols.
Strategic Management Process These dimensions are levers that strategists can use to influence and direct strategy formulation. implementation. liberal. The strategic management process takes place largely within a particular organization culture. conservative. An organization¶s culture must support the collective commitment of its people to a common purpose. and evaluation activities. Every organization like an individual¶s personality have different cultures ± they could be warm. harsh. It must foster competence and enthusiasm among managers and employees . friendly. open. or likable. aggressive. innovative.
. implementation. like strong work ethic or highly ethical beliefs. If strategies can capitalize on cultural strengths. and evaluation of strategies.Strategic Management Process Organizational culture significantly affects business decisions and thus must be evaluated during an internal strategic management audit. The challenge of strategic management is to bring about the changes in organizational culture and individual mindsets that are needed to support the formulation. However. then management can implement changes swiftly. strategic changes may be ineffective or even counterproductive. If the firm¶s culture is not supportive.
detail set of techniques and behaviors that manage anxieties. an unquestioned belief about the practical benefits of certain techniques and behaviors that is not supported by facts. usually used to explain origins or transformation of something.Strategic Management Process Cultural Products or Dimensions Rites . technical consequences of practical importance. Also. . but seldom produce intended. Myth ± A dramatic narrative of imagined events. usually for the benefit of an audience.Relatively elaborate. planned sets of activities that consolidate various forms of cultural expressions into one event. Ceremonial ± A system of several rites connected with a single occasion or event. Ritual ± A standardized. dramatic. carried out through social interactions.
Strategic Management Process Saga ± A historical narrative describing the unique accomplishments of a group and its leaders. Story ± A narrative based on true events. Symbol ± Any object. usually by representing another thing. act. Language ± A particular form or manner in which members of a group use sounds and written signs to convey meanings to each other. event. usually in heroic terms. Folktale ± A completely fictional narrative. Legend ± A handed down narrative of some wonderful event that is based on history but has been blown up with fictional details. . sometimes a combination of truth and fiction. or relation that serves as a vehicle for conveying meaning.
Belief ± An understanding of a particular phenomenon. .life-directing attitudes that serve as behavioral guidelines.Strategic Management Process Metaphors ± Shorthand words used to capture a vision or to reinforce old or new values. Heroes/Heroines ± Individuals whom the organization has legitimized to model behavior for others. Values .
planning. Planning enables a firm to take into account relevant factors and focus on the critical ones. . and controlling. staffing. and planning is the essential bridge between the present and the future that increases the likelihood of achieving the desired results. Planning enables a firm to gather the resources needed and carry out tasks in the most efficient way. Planning is an up-front investment in success. Planning The only thing certain about the future of any organization is change. organizing.Strategic Management Process Management The function of management are five basic activities. motivating.
what. where. when. why. Planning helps ensure that the firm can be prepared for all reasonable eventualities and for all changes that will be needed. .Strategic Management Process Planning enables a firm to identify precisely what is to be achieved and to detail precisely the who. Successful organizations strive to control their own futures rather than merely react to external forces and events as they occur. and how needed to achieve desired objectives. Strategic management can be viewed as a formal planning process that allows an organization to pursue proactive rather than reactive strategies.
± Breaking tasks down into jobs ( work specialization ).Strategic Management Process Organizing The purpose of organizing is to achieve coordinated efforts by defining tasks and authority relationship. Resources are allocated more effectively and used more efficiently in a well organized firm than in a disorganized firm. Organizing means determining who does what and who reports to whom. ± Combining jobs to form departments ( departmentalization). and ± Delegation authority. . The organization function consist of three sequential activities.
Strategic Management Process Breaking tasks down into jobs require development of job description and job specification. divisional. span of control. which lead to specialization and according to Adam Smith (Wealth of Nations published 1776) would lead to higher productivity. strategic. Changes in strategy often require changes in structure because positions may be created. and matrix. business unit. or merged. deleted. Combining jobs to form departments results in an organizational structure. . and chain of command. The most common forms of departmentalization are functional.
. Employees of today are more educated and capable of participation in organizational decision making. and to be held accountable for results Delegation of authority is embedded in strategic management process.Strategic Management Process Delegation authority is an important activity as evidenced in old saying ³ you can tell how good a manager is by observing how his/her department functions when he or she is not there´. They expect to be delegated authority and responsibility.
Growth in sales. understandable. Earning per share and Social responsibilities. ± ± ± ± ± ± ± Growth in assets. Profitability. measurable. Degree and nature of diversification. Objectives should be quantitative. hierarchical.Strategic Management Process Strategic Objectives Strategic objectives or long-term objectives represent the results expected from pursuing certain strategies. realistic. challenging. . Market share. and obtainable. Objectives are commonly stated in terms of.
Strategic Management Process Clearly stated objectives help stakeholders understand their role in an organization. an organization can minimize potential conflicts later during implementation . They provide basis for consistent decision making by managers whose values and attitudes differ. By making objectives through consensus.
Strategic Management Process
Strategy Analysis And Choice
Identifying and evaluating alternative strategies should involve maximum number of managers and employees. All the participant should have the firm¶s external and internal audit information by their sides. The firm¶s external/internal audit, coupled with mission statement, will help participants to crystallize the particular strategy that could benefit the firm most. All the feasible alternate strategies be discussed and ranked in the order of attractiveness, like; ± 1. Should not be implemented.
Strategic Management Process
± 2. Possibly should be implemented. ± 3. Probably should be implemented. ± 4. Definitely should be implemented. The process will result in prioritized list of best strategies reflecting the collective wisdom of the group.
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expectations and morals comprising standards of conduct for a population or profession. . but also to broader set of moral principles expected by all or by a segment of society.Internal Environment Analysis Business Ethics and Social Responsibility Ethics A system of behaviors. Unethical Behavior Conduct that is considered µwrong¶ or µbad¶ in the context of a moral code. Ethical Behavior Conduct that is considered µright¶ or µgood¶ in the context of a governing moral code. It conforms not only to the law.
and ethical rules. .Code Of Ethics A formal statement of the organization¶s values. Ethical Standard A guidelines governing moral conduct of a particular group. ethical principles.
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