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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.
may lead to regulation on consumers in future. friends neighbors etc. ± It has transferred power from businesses to individuals . . ± Buyers can get best price and service by quickly scanning hundreds of vendor offerings.Evolution of Strategic Management Internet and PCs are changing our lifestyle the way we interact with our families. ± It promotes endless comparison shopping thus enabling consumers worldwide to band together to demand discounts.
Evolution of Strategic Management Internet has changed the economics of business in every single industry worldwide. . the Internet will change society more than telephone and television combined. ± Slogans and company¶s like e-Bay. ± Business to Business e-commerce is five time greater than consumer e-commerce. ± According to seventy four percent Americans in a survey. e-commerce. e-Trade. e-mail and e-toys have become integral part of everyday life worldwide.
finance/ accounting. marketing. and computer information systems to achieve organizational objectives. It focuses on integrating management. production /operations.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. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow.
Three stages of Strategic Management Process. ± Strategy formulation. ± Strategy implementation. systematic approach for making major decisions in an organization. determining internal strengths and weaknesses. establishing long term objectives. generating alternative strategies and choosing particular strategy to pursue. identifying an organization¶s external opportunities and threats. ± Strategy evaluation. . logical. It attempts to organize qualitative and quantitative information in a way that allows effective decision making under uncertainty.Strategic Management Process Strategic Management Process It is an objective. Strategy Formulation Developing a vision and mission.
³ To be the first choice in the printed communication business. . and being the best is what Atlanta Web pledges to work hard at being ± every day. ³ Our vision is to take care of your vision´ A vision statement of Atlanta Web Printers.Strategic Management Process Vision Statement What do we want to become? A vision statement of an eye clinic. The first choice is the best choice.
.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.
Provide a basis. Establish a general tone or organizational climate. or standard. Specify organization¶s purpose and then translate these into objectives in such a way that cost. .Strategic Management Process Importance of Vision and Mission Statements Ensure unanimity of purpose within the organization. for allocating organizational resources. time and performance parameters can be assessed and controlled. Facilitate the translation of objectives in to work structure involving the assignment of tasks to responsible elements in organization.
legal.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. They are largely beyond the control of a single organization-thus the word external. . Firms to formulate strategies to take advantage of external opportunities and to avoid/reduce the impact of external threats. governmental. environmental. political. technological or competitive trends. social. cultural.
They arise in the management. Organizations strive to pursue strategies that capitalize on Internal strengths and eliminate internal weaknesses. production/ operations. research and development and management information system activities of a business. finance/accounting. marketing. .Strategic Management Process Internal Strengths and weaknesses An organization¶s controllable activities that are performed especially well or poorly.
Internal factors can be determined by computing ratios. Strengths and weaknesses can be determined relative to a firm¶s own objectives. advertising effectiveness and customer loyalty.Strategic Management Process Strengths and weaknesses are determined relative to competitors. Strengths and weaknesses can be determined by elements of being rather than performance. production efficiency. Survey method could be used to determine employee morale. . measuring performance and comparing to past periods and industry averages.
reveal priorities. create synergy. measurable. motivating and controlling activities. focus coordination and provide a basis for effective planning.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. Objectives state direction. aid in evaluation. . organizing. consistent. reasonable and clear. Objectives should be challenging.
oriented having multifunctional or multidivisional consequences for the organization. Strategies are potential actions thus future. acquisition. . product development. liquidation and joint venture. market penetration. diversification.Strategic Management Process Strategy It is the means by which long-term objectives can be achieved. Business strategies may include geographic expansion. retrenchment.
Whether to merge or form a joint venture How to avoid a hostile takeover. Whether to enter international market. . Whether to expand operations or diversify.Strategic Management Process Strategy formulation issues Deciding what new business to enter What businesses to close. How to allocate resources.
Developing and utilizing information systems. Redirecting marketing efforts. Developing a strategy-supporting culture Creating an effective organizational structure. and Linking employee compensation to organizational performance .Strategic Management Process Strategy Implementation It is also called ³the action stage of strategic management´. motivate employees. It entails establishment of annual objectives. and allocate resources so that formulated strategies can be executed. Strategy Implementation includes. devise policies. Preparing budget.
requires good intuitive and analytical skills 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 .Strategic Management Process Implementing Strategies Strategy implementation is different than strategy formulation. Strategy formulation ± positioning forces before the action Strategy implementation ± managing forces during the action Strategy formulation .focuses on effectiveness Strategy implementation .
requires coordination among a few individuals Strategy implementation . for profit or nonprofit organizations Strategy implementation .concepts and tools similar for small.varies substantially among different types and sizes of organizations . large.Strategic Management Process Strategy formulation .requires coordination among many individuals Strategy formulation .
± Measuring performance. ± Review external and internal environment factors which are bases for current strategies. Strategy evaluation is necessary because success today is no guarantee of success tomorrow . All strategies are subject to future modifications because of persistent changes in the external and internal environment of an organization. ± Taking corrective actions.Strategic Management Process Strategy Evaluation It is the means for management to determine whether the strategy is working or otherwise. Three fundamental strategy evaluation activities are.
± 1. ± 2. Establish and provide the sources necessary to complete each step. ± 4.Strategic Planning Types of Plans Single use plan A plan designed to fit one-time situation. The plan becomes obsolete when its one-time goals have been achieved. Program A complex single-use plan consisting of a set of interrelated actions aimed at achieving a one-time major goal. To develop a program. Divide the course of action into steps. . Two common types of single-use plans are programs and projects. managers. Determine the logical sequence of steps. ± 3. Decide who will be responsible for each step.
and ± 6.Strategic Planning -5. procedures.Policy ± a standing plan that provides broad guidelines for directing managerial activities in pursuit of organizational goals . . Projects integrate fewer activities and resources than programs and are often developed as subunits of programs. Gauge the time needed to finish each step. Prepare a schedule for implementation. and rules. Bhasha Dam project in the national program of provision of electricity to the whole country. for example. Three commonly used types of standing plans are policies. Standing plans A plan for guiding management decisions and activities in situations that recur repeatedly. Project A single-use plan that is narrower in scope than a program and aimed at achieving a specific one-time goal.
Contingency Plans Alternative courses of actions to be followed if unforeseen environmental shifts occur. ± Rule ± a standing plan specifying the circumstances in which certain activities can or cannot be performed. .Strategic Planning ± Procedure ± a standing plan encompassing a series of detailed steps to be followed in particular recurring situation.
Strategic Planning Levels of Planning Strategic Tactical Operational General Time Period Considered for Plans Strategic Plans .5 years Tactical Plans .1 year .3 years Operational 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
Businesses show significant improvement in sales. High performing firms do systematic planning to prepare for future fluctuations in their external and internal environment. . profitability and productivity.Strategic Planning Benefits of Strategic Planning Financial Benefits Organizations using strategic management concepts are more profitable and successful than those who do not. These firms generally exhibit superior long-term financial performance relative to their industry.
. Clear understanding of performance-reward relationships. Enhanced awareness of external threats An improved understanding of competitors¶ strategies. Strategic management enhances the problem-prevention capabilities of organizations because it promotes interaction among managers at all divisional and functional levels.Strategic Planning Nonfinancial Benefits Strategic management offers. Increased employee productivity. Reduced resistance to change.
Creates a framework for internal communication among personnel. and provides a unifying framework. Helps integrate the behavior of individuals into a total effort. Facilitates managerial control through setting of standards for monitoring and measuring performance. . Encourages forward thinking. avoiding piecemeal decision making. prioritization and exploitation of opportunities. Allows more effective allocation of time and resources to identified opportunities. Presents a framework for improved coordination and control of activities.Strategic Planning Benefits of Strategic Planning Allows for identification. Provides a basis for clarifying individual responsibilities. Directs decision making to support established objectives.
Laziness ± may not want to put effort needed for planning.Strategic Planning Reasons For No Strategic Planning By Firms Poor reward structure ± often fail to reward success but ready to punish for failure. Too Expensive ± culturally opposed to spending resources. Content with success ± they think no need to plan because things are fine as they stand. Waste of time ± see planning as waste of time since no marketable product is produced. ( time spent on planning is investment). Fire-fighting ± busy in crisis management and not finding time to plan. .
of aptitude with new system or of their ability to take on new roles. However. or privilege through effectively using old system. Self-interest ± when some one has achieved status. cumbersome. impractical. . being overconfident or overestimating experience can bring failure Prior bad experience ± plans have been long. he/she sees anew plan as threat. can also be done badly. no risk of failure. Honest difference of opinion ± sincerely believe the plan is wrong as they are watching the situation from different viewpoing. Fear of Unknown ± uncertain of abilities to learn new skills. they may rely less on formal planning.Strategic Planning Fear of failure ± not doing anything. there is some risk of failure. Overconfidence ± as individuals amass experience. like anything else. Planning. However whenever something worthwhile is attempted. or inflexible.
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. .Types of Strategies Integration Strategies Intensive Strategies Diversification Strategies Defensive Strategies Michael Porter¶s Generic Strategies Strategy is choosing among the alternatives.
Types of Strategies Integration Strategies Forward integration Backwind integration Horizontal integration Forward Integration Gaining ownership or increased control over distributors or retailers by.costs and opportunities are spread across many individuals. ± Opening company¶s stores. ± Franchising .. ± Establishing websites to sell products directly to consumers. retail outlets .
unreliable or incapable of meeting the firms distribution needs. however. Advantages of stable productions are high. . firms having forward integration are availing competitive advantage. organizations can increase the predictability of the demand through forward integration. Availability of quality distributors is limited. When profit margins for distributors or retailers are high. When the industry is growing and expected to continue growing.Types of Strategies Situations when forward integration may be an effective strategy. When organization has both the capital and human resources. Organizations present distributors are expensive. forward integration reduces organization¶s ability to diversify if it¶s basic industry falters.
Global competition is prompting firm¶s to reduce number of suppliers and to demand higher level of service and quality from selected ones. Firms increasingly use websites on backward integration opportunities. .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. too costly or cannot meet firm¶s requirements Firms having global sources of supply opt for deintegration.
When an organization has both capital and human resources to manage the new business of supplying its own raw material. 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.Types of Strategies Situations when backward integration may be an effective strategy When present suppliers are expensive. unreliable.
When an organization needs to acquire a needed resource quickly. When present supplies have high profit margin. tempting to invest into the venture. . as organization can stabilize the cost of its raw materials and associated products through backward integration.Types of Strategies Situations when backward integration may be an effective strategy (contd) When the advantages of stable prices are particularly important.
Types of Strategies Horizontal Integration A strategy of seeking ownership of or increased control over a firm¶s competitors. . It is increasingly being used by the firms as growth strategy. Mergers between direct competitors create efficiencies because of potential for eliminating duplicate facilities. Mergers. acquisitions and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies.
.( not if competitors are doing poorly. When increased economies of scale provide major competitive advantage. and overall industry sales are declining. when competitors are faltering due to lack of managerial expertise or a need for particular resources that an organization possesses. When the firm has the necessary resources of capital and human talent to manage the expanded organization.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.
advertising expenditure.Types of Strategies Intensive Strategies Requires intensive effort from the firm to improve it¶s competitive position with existing products. 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. .
The correlation between dollar sales and dollar marketing expenditure has been high. Increased economies of scale provide major competitive advantage. The usage rate of present customers could be increased significantly. . Market shares of major competitors have been declining while total industry sales have been increasing.Types of Strategies Situations when market penetration may be an effective strategy Current markets are not saturated with a particular product or service.
Organization is very successful at what it does. 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¶s basic industry is becoming global. New untapped or unsaturated markets exist. Situations when market development may be an effective strategy New. Organization has the necessary resources to expand operations. Organization has excess production capacity. . reliable.
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. . It normally entails large R & D expenditure. Organization competes in an industry that is characterized by rapid technological development.
Organization has strong research and development capabilities Diversification Strategies Diversification strategy is followed to avoid dependence on any single industry. especially when the company is competing in an un attractive industry. Concentric. Organization competes in a high-growth industry.Types of Strategies Major competitors offer better -quality products at comparable prices. but related. Concentric Diversification Acquiring new. . Horizontal and conglomerate. There are three types of diversification strategies. products or services.
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 the company¶s products are in the declining stage of the product¶s life cycle.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 new related products could be offered at highly competitive prices.
unrelated products or services for present customers. The new product has countercyclical sales patterns compared to an organization¶s present products. Revenue of the organization would increase significantly.Types of Strategies Horizontal Diversification Adding new. Organization competes in a highly competitive and / or a no growth industry yielding low returns and profit margins. . Organization¶s present marketing channels can be used to market new products to current customers. Situation when Horizontal Diversifications may be an effective strategy.
Organization has the capital and managerial talent to successfully compete in a new industry. . unrelated products or services. The existing markets for company¶s present products are saturated. Antitrust action could be charged against an organization that has concentrated on a single industry. Situations when conglomerate diversification may be an effective strategy. Organization has the opportunity to purchase unrelated business providing an attractive investment opportunity. There exists financial synergy between the acquired and acquiring firms.Types of Strategies Conglomerate Diversification Adding new. Organization¶s basic industry is experiencing decline in sales / profits.
Types of Strategies Defensive Strategies Retrenchment. Retrenchment An organization regroups through cost and asset reduction to reverse declining sales and profits. Entails selling off land and buildings to raise needed cash. automating processes. closing marginal businesses. .. Also called a turnaround or reorganization strategy. reducing the number of employees and controlling expenses. Divestiture and Liquidation are defensive strategies. pruning product lines. closing obsolete factories. Bankruptcy can be an effective type of retrenchment strategy. allowing a firm to avoid major debt obligations and to void union contracts. is designed to fortify an organization¶s basic distinctive competence.
The organization is plagued by inefficiency.Types of Strategies Situations when retrenchment may be an effective strategy. minimize external threats. poor employee morale. and pressure from stakeholders to improve performance. An organization has failed to meet it¶s objectives and goals repeatedly overtime. take advantage of internal strengths and overcome internal weaknesses overtime. . The organization is a weaker competitor in the industry. low profitability. Organization has grown so large so quickly that major internal reorganization is needed. 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. Divestiture can be apart of an overall retrenchment strategy to rid an organization of businesses that are unprofitable. . that require too much capital. or that do not fit well with the firm¶s other activities. The strategy is used to raise capital for further strategic acquisition or investments.
values or needs. A division is misfit with the rest of an organization. A division needs more resources to be competitive than the company can provide. employees. A large amount of cash is required quickly and cannot be obtained from other sources. Government antitrust action threatens an organization . managers. customers.Types of Strategies Situations when Divestiture may be an effective strategy. A division is responsible for an organization¶s overall poor performance. The organization has pursued a retrenchment strategy but failed to accomplish needed improvements. may be due to different markets.
Situations when liquidation may be an effective strategy to pursue.Types of Strategies Liquidation Selling all of a company¶s assets. than liquidation is the only way to orderly get max cash from firm¶s assets. Organization has pursued both a retrenchment strategy and divestiture strategy and both have failed. Liquidities is a recognition of defeat and therefore. in parts. can be an emotionally difficult strategy. It is better to cease operating than to continue loosing large sums of money. When stockholders of a firm can minimize their losses by selling the organization¶s assets. . When only alternative left is bankruptcy. for their tangible worth is called liquidation.
Strategies allow organizations to gain competitive advantage from three different bases. These strategies imply different organizational arrangements. control procedures and incentive systems. . Differentiation and focus. 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. cost leadership. Cost leadership emphasis on producing standardized products at a very low per unit cost for price sensitive consumers.Types of Strategies Michael Porter¶s Generic Strategies. Large firms with greater resources compete on a cost leadership and or differentiation basis while small firms often compete on focus basis.
Types of Strategies Cost Leadership Strategy Reason for forward. of buyers with significant bargaining power. buyer are not bothered about brands and there are large no. Perform cost-benefit analysis to evaluate ³sharing opportunities´ of resources and knowledge among firm¶s existing and potential business units. It is an effective strategy in situations where customers are price sensitive. there is few ways of achieving product differentiation. Pursue cost leadership in conjunction with differentiation. . backward and horizontal integration is to gain cost leadership.
Competitors imitation of strategy may result in lowering overall Industry profits. . limited perks. lower overheads. intolerance of waste. buyer¶s interest switching to other differentiating features beside price. rewards linked with cost containment.Types of Strategies Implies high efficiency. technology break through make strategy ineffective.
Special features could be superior service. useful life. spare parts availability. . product performance. gas mileage or ease of use.Types of Strategies Differentiation Strategy. gain customer loyalty. engineering design. Will allow a firm to charge high price. Follow a strategy after careful study of buyers needs and preferences to determine and incorporation of one or more differentiations features. Strategy requires strong coordination between R&D and marketing functions.
Types of Strategies Focus Strategies To concentrate on a particular group of customers. . geographic market. Focus Strategies are most effective when. Market Penetration and Market Development strategies offer substantial focusing advantages. ± Rival firms are not attempting to specialize in the same target market. ± Consumers have distinctive preferences or requirements. 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.
Risks of pursuing Focus Strategies. The consumer preferences drifting towards the product attributes desired by the market as a whole. The possibility of many competitors recognizing the successful focus strategy and copying it. .Types of Strategies Medium to large firms can pursue focus strategies only in conjunction with differentiation or cost leadership-based strategies.
± Cross-distribution agreements.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. The sponsoring firms normally form a separate organization with shared ownership. ± Research and development partnerships. Other types of cooperative arrangements could be. ± Cross-licensing agreements. .
Types of Strategies ± Cross-manufacturing agreements. Common Problems Leading To Failure Of Joint Ventures 1.The venture may begin to compete more with one of the partners than the other.Managers who must collaborate daily in operating the venture are not involved in forming or shaping the venture. if supported unequally. problems arise. 2. and ± Joint-bidding consortia. . The venture may not be supported equally by both partners. 3.
When a merger or acquisition is not desired by both parties. or vice versa. . Acquisition. Friendly Merger . Takeover/Hostile Takeover .If the acquisition is desired by both firms.when a large organization purchases (acquires) a smaller firm.Types of Strategies Merger / Acquisition Merger ± When two organizations of about equal size unite to form one enterprise.
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. Not all mergers are effective and successful ± about half produced negative returns to shareholders (Wall Street Journal studies) .
customers. To reduce managerial staff. To gain access to new suppliers. To gain economies of scale To smooth out seasonal trends in sales. products and creditors.Types of Strategies Reasons for Mergers and Acquisitions To provide improved capacity utilization. distributors. To make better use of the existing sales force. To reduce tax obligations. . To gain new technology.
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 .
Thus. It is a tool used by corporations to avoid strategic surprise and to ensure long-term health . Scan Internal environment to ascertain strengths and weaknesses Monitor. .Strategic Management Process Environmental Scanning Scan external environment to identify possible opportunities and threats. evaluate and disseminate information from external and internal environment to the management.
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. the external (industry) factors are more important than internal factors in a firm achieving competitive advantage. finance etc. and gain a full understanding of key external factors relationships within that industry.Strategic Management Process The Industrial Organization (IO) View According to IO approach. . IO perspective requires the firms to compete in attractive industries. Competitive advantage is determined largely by competitive positioning within and industry. avoid weak or faltering industries.
structures. and level of competitiveness than on internal resources. Research findings suggest that approximately 20 percent of a firm¶s profitability can be explained by the industry.Strategic Management Process Firm performance is primarily based more on industry properties. barriers to market entry. However. . such as economies of scale. product differentiation. whereas 36 percent of the profitability is attributed to the firm¶s internal factors. and operations. capabilities.
. Products. cultural. Managers. Special interest groups.Strategic Management Process Key External Forces: ± ± ± ± ± Economic forces. Labor Unions. Political. Competitive forces. Creditors. Services. governmental and legal forces. Markets and Natural Environment. Technological forces. Trade Associations. Social. Communities. Suppliers. Stockholders. Distributors. Governments. Customers. Employees. Organization¶s Operating Environment: Competitors. demographic and environmental forces.
Strategic Management Process The effects/influences of external environment on organizations operating environments give rise to opportunities and threats for the organization. External forces directly effect both suppliers and distributors. . ± The choice of businesses to acquire or sell. ± The nature of positioning and market segmentation strategies. Changes in external forces is reflected into: ± Changes in consumer demand for both industrial and consumer products and services. External opportunities /threats enable organizations to develop clear missions and strategies to achieve their objectives.
± Important for achieving long-term and annual objectives. List of key external factors be communicated to all in the organization. to identify key external factors which are. Gather competitive intelligence about key external force¶s trends by using print/electronic media. Evaluate and assimilate the info. ± Measurable. ± Hierarchical effecting overall company and functional/ divisional areas. .Strategic Management Process Get the participation of max. number of managers and employees. human resources and internet. ± Applicable to all competing firms.
The level of disposable income. Interest rates. NAFTA. . 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 firm must consider.Strategic Management Process Economic Forces The Nature and direction of economy in which firm operates. OPEC. ± ± ± ± ± ± ± General availability of credit. etc. 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. stock prices.
. demographic and environmental factors have impact on virtually all products. Changes in social. markets and customers and all sorts of organizations. services. and all industries are challenged by the opportunities and threats arising from these changes. Cultural.Strategic Management Process Social. Demographic and Environmental forces. cultural.
rules for laying off employees . (Golden hand shake) under Govt. subsidizers.Strategic Management Process Political. employers and customers of organizations. Governmental and Legal Forces Federal. Companies have to pay heavy penalty in shape of expensive severance packages. state. local and foreign governments are major regulators. governmental and legal factors can represent key opportunities or threats for both small and large organizations. Political.
Changes in tax rates. Mass communication and high technology is creating similar patterns of consumption in diverse cultures world wide. special tariffs can affect firms significantly. Political forecasts is critical for multinational firms that depend on foreign countries for natural resources. import duty on raw materials. or markets for their products. . subsidies. facilities. contracts.Strategic Management Process Political forecast is vital part of external audit for industries/ firms depending on Govt. companies relying only on domestic market may find it difficult to survive.
increasing speed of distribution . New positions of CIO and CTO are being introduced in companies to effectively capitalize on e-commerce.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. . altering economies of scale and changing entry barriers. It is changing the nature of opportunities and threats by altering the life cycle of products.
operations. ± Create shortage in technical skills. ± Create new more powerful competitive advantage. markets. ± Change the relative cost position in an industry. ± Create shorter production runs. . ± Change values and expectations of employees. marketing practices and competitive position. Technological breakthroughs can dramatically affect.Strategic Management Process Technological forces represent major opportunities and threats which should be taken care of while formulating strategies. manufacturing processes. suppliers. managers and customers. ± Products. services. distributors. customers. ± Render existing products and services obsolete.
opportunities. objectives and strategies. Characteristics of a competitive firm. ± Bringing improvement. ± People make a difference. ± Acquisition is essential to growth. not just in product but the whole company. ± Understanding and remembering precisely what is your business. Nothing quite recedes like success. weaknesses. ± Market share. threats. capabilities. ± There is no substitute for quality and no greater threat than failing to be cost-effective on a global basis. ± Innovate or evaporate. . The most-successful purchases are in niches that add technology or a related market.Strategic Management Process Competitive Forces It is imperative in external audit to identify rival firms and determine their strengths. tired of hearing it? Too bad.
Major competitor¶s weakness can represent external opportunity and major strength may represent key threat. . implementation and evaluation decisions. Good competitive intelligence in business is one of the key to success. Competitive intelligence is equally applicable for strategy formulation. Benefits of corporate spying include increased revenues.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. lower costs and better decision making.
wiretapping. online interviews with celebrities and government filings. want ads. and computer break-ins should not be used in CI. employees. customers. Identify areas in which competitors are vulnerable and assess the impact strategic actions would have on competitors. distributors. suppliers. creditors. Identify competitors potential moves that might endanger a firm¶s position in the market. . newspaper articles. Sources of CI Internet. managers.Strategic Management Process Objectives of Competitive Intelligence (CI) To provide general understanding of an industry and its competitors. Cooperation Among Competitors Unethical tactics like bribery. trade journals.
± ± ± ± ± Rivalry among competing firms.Strategic Management Process Industry Environment Competitive Analysis: Porter¶s Five-Forces Model. Potential development of substitute products. the nature of competitiveness in a given industry can be viewed as a composite of five forces. Bargaining power of suppliers. According to Model. Potential entry of new competitors. A widely used approach for developing strategies in many industries. . 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 .
The intensity of rivalry increases. A successful strategy giving competitive advantage to a firm can be pursued by rival firms. enhancing quality. . Change in strategy by one firm may be met with retaliating countermoves like lowering of prices. extending warranties or increasing advertising. providing services.Strategic Management Process Rivalry among Competing firms The most powerful of five Competitive forces. ± By becoming more equal in size and capability. adding features. ± with the increase in number of competitors.
± when product is perishable. ± Barriers to leaving the market are high. ± Industry¶s profits decline. ± When mergers and acquisitions are common in the industry. .Strategic Management Process -With decrease in demand of industry¶s products. ± When fixed costs are high. ± The industry becomes Inherently unattractive. _ Consumers can switch brands easily. As rivalry among competing firms intensifies.
sophisticated technology and know how. undesirable locations.Strategic Management Process Potential Entry of New Competitors Easy entry of a firm in an industry. strong brand preference. increases the intensity of competitiveness among the firms. Govt. Economy of scale. possession of patents. lack of access to raw materials. strong customer loyalty. Barriers to entry include. counterattack by entrenched firms or potential saturation of the market: . large capital requirement. regulatory policies.
.Strategic Management Process New firms enter the industry with. ± lower prices. ± Substantial market resources. Strategist must identify new entrants. their strategies. ± High quality products. plan counter attack if required and capitalize on existing strengths and weaknesses.
Competitive strength of the substitute product could be measured by its market share. or aluminum can producer. like plastic container producer competing with glass. paperboard. Or the firms plane for increased capacity and market penetration.Strategic Management Process Potential Development of Substitute Products Firms are in close competition with producers of substitute products. Presence of substitute put ceiling on the price of a product. competitive pressure arise when price of the substitute product decreases or consumer¶s switching cost decreases. .
± There is large number of suppliers. This strategy is effective when suppliers are unreliable. too costly or not capable of meeting a firm¶s demand on consistant bases. ± There are only few substitute raw materials. ± When cost of switching raw materials is high.Strategic Management Process Bargaining Power of Suppliers It affects the intensity of competition in industry when. Firms may pursue a backward integration strategy to gain control or ownership of suppliers. .
± Buy in volume. ± Products being purchased are standard or undifferentiated. . Rival firms offer extended warranties or special services to gain consumer loyalty. and accessory packages. Consumers can negotiate selling price.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. warranty coverage.
by writing opportunities first and than threats. ± i) List external factors identified in external audit (about 10 to 20 factors) including both opportunities and threats. legal. governmental. social. and competitive information. technological.Strategic Management Process The External Factor Evaluation (EFE) Matrix The matrix allows the strategists to summarize and evaluate economic. political. demographic. . The Matrix can be developed in five steps. cultural. environmental.
0. . The total of all weight assigned to the factors must be equal 1. and 1 = the response is poor. 3 = the response is above average.0 (very important). 4 = the response is superior. ± 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. 2 = the response is average. where. The weight indicates the relative importance of that factor in success of the firm¶s industry.Strategic Management Process ± ii) Assign each factor a weight ranging from 0. Appropriate weight can be determined by comparing successful with unsuccessful competitors or by discussing the factor and reaching a group consensus.0 (not important) to 1.
± iv) Multiply each factor¶s weight by its rating to determine a weighted score.0 and the lowest 1. .5. ± v) Sum the weighted score for each variable to determine the total weighted score for the organization. The score of 4. or taking advantage of opportunities and minimizing effects of threats.0.0 indicates that the organization is responding in an outstanding way to existing opportunities and threats in its industry. whereas the weights in step 2 are industry based. The highest possible total weighted score for an organization is 4. The average total weighted score is 2.Strategic Management Process Ratings are based on effectiveness of the firm¶s strategies thus company-based.
20 .05 .05 .05 .20 .15 .05 .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.15 .60 .15 .15 .15 .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 .40 .05 4 4 3 4 3 3 4 3 3 .10 .
not high Recent loss of joint venture Total Weight Rating Weighted Score .05 .10 1.Strategic Management Process Key Internal Factors Internal Weaknesses Most properties located in L.00 1 2 2 1 .05 .75 .10 .05 .05 .10 2.10 .V Little diversification Family reputation.
The weights and total weighted scores in both a CPM and EFE have the same meaning. However. Critical success factors in a CPM include both internal and external issues. therefore the ratings refer to strengths and weaknesses. ± 4 = major strength ± 3 = minor strength ± 2 = minor weakness ± 1 = major weakness . where.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.
Strategic Management Process For example critical success factors for firms may include advertising. proprietary or patent advantages. effectiveness of sales distribution. financial position customer loyalty. production capacity and efficiency. could be. technological advantages and e-commerce expertise. management. price competitiveness. location of facilities. product quality. experience. Other than critical success factors. global expansion and market share. . union relations. breadth of product line.
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. Three critical ingredients of a successful strategy. ± Strategy be carefully executed. Involvement of representatives of managers and employees from throughout the firm to determine firm¶s internal strengths and weaknesses . ± Strategy to place realistic requirements on the firm¶s resources. provide the basis for establishing objectives and strategies. ± Strategy be consistent with conditions in competitive environment.
Strategic Management Process The Resource-Based View (RBV) According to RBV approach. location. technology. . Three Basic Resources Physical resources. The organizational performance will primarily be determined by internal resources. raw materials and machines. Physical Resources Plant and equipment. internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage. and organizational resources. human resources. which can be grouped into three categories.
type. experience. accumulated experience within organization and so on. amount. training. patents.Strategic Management Process Human Resources All employees. skills. The firm must consider the mix. copyrights. and nature of a firm¶s internal resources first in devising strategies that can lead to sustainable competitive advantage. information systems. intelligence. planning processes. and abilities Organizational Resources Firm structure. knowledge. trademarks. . RBV theory asserts that sources are actually what helps a firm exploit opportunities and neutralize threat. databases.
people. becomes the basis for lasting competitive advantage. . and processes that a company uses to transform inputs into outputs. Core Competence A capability or skill running through a firm¶s businesses and that once identified.Strategic Management Process Organizational Abilities The skills. either with greater efficiency in the processes or greater quality in the output or both. nurtured and deployed throughout the firm. abilities and ways of combining assets. They enable the firm to take the same input factors as rivals and convert them into products and services. Finely developed capabilities can be a source of sustained competitive advantage.
± Cash. ± Commodities. . 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. Easy to imitate.
± Reputation for fairness. ± Employee Satisfaction. .Strategic Management Process Can be imitated (but may not be). ± Unique assets (mineral rights). ± Patents. ± capacity ± Economy of scale Difficult to Imitate ± Brand loyalty. ± Unique locations. Cannot be Imitated.
Involves identifying and evaluating firm¶s resources that possess strategic value and can provide basis for future competitive advantage.Based View in Internal Analysis. .Strategic Management Process Durability: How rapidly will the resource depreciate? Substitutability: Are other alternatives available? Using Resource.
Disaggregate resources: Break them into more specific competencies rather than stay with broad categorizations. activities and processes having potential competitive advantage.Strategic Management Process Methods to identify resources with strategic value. . Look at organizational processes and combinations of resources and not only at isolated assets or capabilities. Utilize a functional perspective. Separating tangible and intangible assets as well as organizational capabilities can uncover value-building resources and activities. Use value chain approach to identify capabilities.
± Features/décor. floor materials.Strategic Management Process Disaggregating a Restaurant¶s Customer Service Resource. window decorations ± Table layout Table materials . Providing ease of access ± Parking (where appropriate). ± External Signs/ welcome Offering a delightful ambiance ± Floor design. color scheme. ± Door Positioning and style. Theme. ± Bar positioning.
± Marketing literature.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. ± Entertainment for queuers. . ± Visible queuing system.
Job experience Motivation awards. coaching process Discipline system.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. Menu training. ± System of gaining waiter¶s attention . Daily Meetings.
± Kitchen queuing system ± Service standards Reducing the pain of paying the bill. . ± Size of Menu ± Material Menus made off ± Menu dishes ± Menu layout Providing speed of service appropriate to the occasion.Strategic Management Process Ensuring that Menu is fun to use and caters to the diners¶ needs.
stories. language. rituals. symbols. Cultural products or dimensions include values. This definition emphasizes the importance of matching external with internal factors in making strategic choices. and that has worked well enough to be considered valid and to be taught to new members as the correct way to perceive. metaphors. ceremonies. and heroines. . legends. heroes. rites.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. saga. myths. thing. beliefs. and feel.
It must foster competence and enthusiasm among managers and employees . friendly. implementation. or likable. open. conservative. liberal. harsh. The strategic management process takes place largely within a particular organization culture.Strategic Management Process These dimensions are levers that strategists can use to influence and direct strategy formulation. and evaluation activities. aggressive. An organization¶s culture must support the collective commitment of its people to a common purpose. Every organization like an individual¶s personality have different cultures ± they could be warm. innovative.
Strategic Management Process Organizational culture significantly affects business decisions and thus must be evaluated during an internal strategic management audit. If strategies can capitalize on cultural strengths. strategic changes may be ineffective or even counterproductive. implementation. . The challenge of strategic management is to bring about the changes in organizational culture and individual mindsets that are needed to support the formulation. then management can implement changes swiftly. If the firm¶s culture is not supportive. and evaluation of strategies. However. like strong work ethic or highly ethical beliefs.
usually for the benefit of an audience.Relatively elaborate. technical consequences of practical importance. usually used to explain origins or transformation of something. Ceremonial ± A system of several rites connected with a single occasion or event.Strategic Management Process Cultural Products or Dimensions Rites . an unquestioned belief about the practical benefits of certain techniques and behaviors that is not supported by facts. Myth ± A dramatic narrative of imagined events. detail set of techniques and behaviors that manage anxieties. planned sets of activities that consolidate various forms of cultural expressions into one event. dramatic. but seldom produce intended. carried out through social interactions. Ritual ± A standardized. Also. .
act. Language ± A particular form or manner in which members of a group use sounds and written signs to convey meanings to each other. sometimes a combination of truth and fiction. Symbol ± Any object.Strategic Management Process Saga ± A historical narrative describing the unique accomplishments of a group and its leaders. . or relation that serves as a vehicle for conveying meaning. usually in heroic terms. Story ± A narrative based on true events. 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. usually by representing another thing. event.
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 . Belief ± An understanding of a particular phenomenon.life-directing attitudes that serve as behavioral guidelines. .
Planning The only thing certain about the future of any organization is change. and planning is the essential bridge between the present and the future that increases the likelihood of achieving the desired results.Strategic Management Process Management The function of management are five basic activities. . motivating. Planning enables a firm to take into account relevant factors and focus on the critical ones. organizing. Planning is an up-front investment in success. and controlling. Planning enables a firm to gather the resources needed and carry out tasks in the most efficient way. staffing. planning.
Planning helps ensure that the firm can be prepared for all reasonable eventualities and for all changes that will be needed. Strategic management can be viewed as a formal planning process that allows an organization to pursue proactive rather than reactive strategies. . Successful organizations strive to control their own futures rather than merely react to external forces and events as they occur. where. when. why.Strategic Management Process Planning enables a firm to identify precisely what is to be achieved and to detail precisely the who. and how needed to achieve desired objectives. what.
Strategic Management Process Organizing The purpose of organizing is to achieve coordinated efforts by defining tasks and authority relationship. The organization function consist of three sequential activities. ± Combining jobs to form departments ( departmentalization). and ± Delegation authority. . Organizing means determining who does what and who reports to whom. Resources are allocated more effectively and used more efficiently in a well organized firm than in a disorganized firm. ± Breaking tasks down into jobs ( work specialization ).
deleted. divisional. Combining jobs to form departments results in an organizational structure. strategic. and matrix. span of control. . and chain of command. which lead to specialization and according to Adam Smith (Wealth of Nations published 1776) would lead to higher productivity. The most common forms of departmentalization are functional. or merged. business unit. Changes in strategy often require changes in structure because positions may be created.Strategic Management Process Breaking tasks down into jobs require development of job description and job specification.
. Employees of today are more educated and capable of participation in organizational decision making. They expect to be delegated authority and responsibility. 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´.
Earning per share and Social responsibilities. measurable. . Objectives are commonly stated in terms of. Profitability. Market share. hierarchical. ± ± ± ± ± ± ± Growth in assets. Objectives should be quantitative. Degree and nature of diversification. realistic. Growth in sales. and obtainable. understandable. challenging.Strategic Management Process Strategic Objectives Strategic objectives or long-term objectives represent the results expected from pursuing certain strategies.
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 Clearly stated objectives help stakeholders understand their role in an organization.
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.
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± 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. Unethical Behavior Conduct that is considered µwrong¶ or µbad¶ in the context of a moral code. 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. It conforms not only to the law. . Ethical Behavior Conduct that is considered µright¶ or µgood¶ in the context of a governing moral code.
ethical principles. 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. .
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