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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. ± It promotes endless comparison shopping thus enabling consumers worldwide to band together to demand discounts. ± It has transferred power from businesses to individuals . ± Buyers can get best price and service by quickly scanning hundreds of vendor offerings. . friends neighbors etc.Evolution of Strategic Management Internet and PCs are changing our lifestyle the way we interact with our families.
± Business to Business e-commerce is five time greater than consumer e-commerce. e-Trade. ± Slogans and company¶s like e-Bay. . ± According to seventy four percent Americans in a survey. 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. e-commerce. e-mail and e-toys have become integral part of everyday life worldwide.
. marketing. and computer information systems to achieve organizational objectives. production /operations. finance/ accounting. It focuses on integrating management. 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.
Strategy Formulation Developing a vision and mission. logical. ± Strategy evaluation. ± Strategy formulation. identifying an organization¶s external opportunities and threats. ± Strategy implementation. It attempts to organize qualitative and quantitative information in a way that allows effective decision making under uncertainty. systematic approach for making major decisions in an organization. .Strategic Management Process Strategic Management Process It is an objective. Three stages of Strategic Management Process. establishing long term objectives. determining internal strengths and weaknesses. generating alternative strategies and choosing particular strategy to pursue.
The first choice is the best choice. and being the best is what Atlanta Web pledges to work hard at being ± every day.Strategic Management Process Vision Statement What do we want to become? A vision statement of an eye clinic. . ³ To be the first choice in the printed communication business. ³ Our vision is to take care of your vision´ A vision statement of Atlanta Web Printers.
A clear mission statement is essential for effectively establishing objectives and formulating strategies. .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´.
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. Facilitate the translation of objectives in to work structure involving the assignment of tasks to responsible elements in organization. . Establish a general tone or organizational climate. for allocating organizational resources. or standard. Provide a basis.
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. environmental. Firms to formulate strategies to take advantage of external opportunities and to avoid/reduce the impact of external threats. legal. social. They are largely beyond the control of a single organization-thus the word external. demographic. technological or competitive trends. cultural. governmental. . political.
They arise in the management. research and development and management information system activities of a business. Organizations strive to pursue strategies that capitalize on Internal strengths and eliminate internal weaknesses. marketing. . finance/accounting. production/ operations.Strategic Management Process Internal Strengths and weaknesses An organization¶s controllable activities that are performed especially well or poorly.
. advertising effectiveness and customer loyalty. production efficiency. Internal factors can be determined by computing ratios.Strategic Management Process Strengths and weaknesses are determined relative to competitors. Strengths and weaknesses can be determined relative to a firm¶s own objectives. Strengths and weaknesses can be determined by elements of being rather than performance. Survey method could be used to determine employee morale. measuring performance and comparing to past periods and industry averages.
focus coordination and provide a basis for effective planning. . consistent. create synergy. Objectives state direction. aid in evaluation. reveal priorities. Objectives should be challenging. motivating and controlling activities. measurable. organizing. reasonable and clear.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.
liquidation and joint venture. product development. diversification.Strategic Management Process Strategy It is the means by which long-term objectives can be achieved. market penetration. Business strategies may include geographic expansion. . retrenchment. acquisition.oriented having multifunctional or multidivisional consequences for the organization. Strategies are potential actions thus future.
. Whether to expand operations or diversify. Whether to enter international market. How to allocate resources. Whether to merge or form a joint venture How to avoid a hostile takeover.Strategic Management Process Strategy formulation issues Deciding what new business to enter What businesses to close.
Preparing budget. Strategy Implementation includes. and allocate resources so that formulated strategies can be executed. It entails establishment of annual objectives. Developing and utilizing information systems. and Linking employee compensation to organizational performance . motivate employees. Redirecting marketing efforts. Developing a strategy-supporting culture Creating an effective organizational structure.Strategic Management Process Strategy Implementation It is also called ³the action stage of strategic management´. devise policies.
focuses on effectiveness Strategy implementation .requires special motivation and leadership skills .requires good intuitive and analytical skills Strategy implementation .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 efficiency Strategy formulation ± primarily an intellectual process Strategy implementation ± primarily an operational process strategy formulation .
requires coordination among a few individuals Strategy implementation . large. for profit or nonprofit organizations Strategy implementation .Strategic Management Process Strategy formulation .concepts and tools similar for small.requires coordination among many individuals Strategy formulation .varies substantially among different types and sizes of organizations .
± Taking corrective actions. 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. Three fundamental strategy evaluation activities are. ± Measuring performance.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.
. Establish and provide the sources necessary to complete each step. ± 3. ± 2. Divide the course of action into steps.Strategic Planning Types of Plans Single use plan A plan designed to fit one-time situation. ± 4. To develop a program. Decide who will be responsible for each step. managers. ± 1. Program A complex single-use plan consisting of a set of interrelated actions aimed at achieving a one-time major goal. Determine the logical sequence of steps. The plan becomes obsolete when its one-time goals have been achieved. Two common types of single-use plans are programs and projects.
for example. Project A single-use plan that is narrower in scope than a program and aimed at achieving a specific one-time goal. and rules. Prepare a schedule for implementation. Bhasha Dam project in the national program of provision of electricity to the whole country. Projects integrate fewer activities and resources than programs and are often developed as subunits of programs. and ± 6. Three commonly used types of standing plans are policies. . Standing plans A plan for guiding management decisions and activities in situations that recur repeatedly. Gauge the time needed to finish each step.Policy ± a standing plan that provides broad guidelines for directing managerial activities in pursuit of organizational goals . procedures.Strategic Planning -5.
.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. Contingency Plans Alternative courses of actions to be followed if unforeseen environmental shifts occur.
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 .
The Managerial Pyramid Mission Strategic Goals/ Plans (organization as a whole) Tactical Goals/ Plans (major divisions. functions) Operational Goals/ Plans (departments and units) .
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. .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. High performing firms do systematic planning to prepare for future fluctuations in their external and internal environment. Businesses show significant improvement in sales.
Increased employee productivity. . Reduced resistance to change.Strategic Planning Nonfinancial Benefits Strategic management offers. 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. Clear understanding of performance-reward relationships.
and provides a unifying framework. avoiding piecemeal decision making. Provides a basis for clarifying individual responsibilities. Directs decision making to support established objectives. prioritization and exploitation of opportunities. 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. . Facilitates managerial control through setting of standards for monitoring and measuring performance.Strategic Planning Benefits of Strategic Planning Allows for identification. Creates a framework for internal communication among personnel.
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. Fire-fighting ± busy in crisis management and not finding time to plan. . ( time spent on planning is investment). Laziness ± may not want to put effort needed for planning.
Overconfidence ± as individuals amass experience. However. like anything else. Planning. . no risk of failure. being overconfident or overestimating experience can bring failure Prior bad experience ± plans have been long. or inflexible. Honest difference of opinion ± sincerely believe the plan is wrong as they are watching the situation from different viewpoing.Strategic Planning Fear of failure ± not doing anything. Self-interest ± when some one has achieved status. or privilege through effectively using old system. he/she sees anew plan as threat. they may rely less on formal planning. impractical. cumbersome. of aptitude with new system or of their ability to take on new roles. However whenever something worthwhile is attempted. there is some risk of failure. Fear of Unknown ± uncertain of abilities to learn new skills. can also be done badly.
Types of Strategies Integration Strategies Intensive Strategies Diversification Strategies Defensive Strategies Michael Porter¶s Generic Strategies Strategy is choosing among the alternatives. . According to Hansen and Smith. you cant follow a combination strategy for too long. Strategic planning involves ³choices that risk resources´ and ³tradeoffs that sacrifice opportunity´.
± Opening company¶s stores. ± Franchising . retail outlets . ± Establishing websites to sell products directly to consumers.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.
When organization has both the capital and human resources. . forward integration reduces organization¶s ability to diversify if it¶s basic industry falters. Organizations present distributors are expensive. When the industry is growing and expected to continue growing. Availability of quality distributors is limited. firms having forward integration are availing competitive advantage. Advantages of stable productions are high.Types of Strategies Situations when forward integration may be an effective strategy. unreliable or incapable of meeting the firms distribution needs. When profit margins for distributors or retailers are high. organizations can increase the predictability of the demand through forward integration. however.
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 Backward Integration A strategy of seeking ownership or increased control of a firm¶s suppliers particularly in situations when firm¶s suppliers are unreliable.
unreliable. When an organization has both capital and human resources to manage the new business of supplying its own raw material. or incapable of meeting the firms needs. .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. when the number of suppliers is small and the number of competitors is large.
tempting to invest into the venture. . as organization can stabilize the cost of its raw materials and associated products through backward integration. When present supplies have high profit margin.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.
Mergers between direct competitors create efficiencies because of potential for eliminating duplicate facilities. . Mergers. It is increasingly being used by the firms as growth strategy.Types of Strategies Horizontal Integration A strategy of seeking ownership of or increased control over a firm¶s competitors. acquisitions and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies.
. and overall industry sales are declining. when a firm competes in a growing industry. when competitors are faltering due to lack of managerial expertise or a need for particular resources that an organization possesses.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 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.( not if competitors are doing poorly.
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. advertising expenditure.
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. The correlation between dollar sales and dollar marketing expenditure has been high.
inexpensive and good quality channels of distribution are available. Organization¶s basic industry is becoming global. Organization is very successful at what it does. Organization has excess production capacity. reliable. Situations when market development may be an effective strategy New. . Organization has the necessary resources to expand operations.Types of Strategies Market Development It involves introducing present products or services into new geographic areas. New untapped or unsaturated markets exist.
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. Organization competes in an industry that is characterized by rapid technological development. It normally entails large R & D expenditure.Types of Strategies Product Development A strategy that seeks increased sales by improving or modifying present products or services. .
Concentric. . There are three types of diversification strategies. Organization has strong research and development capabilities Diversification Strategies Diversification strategy is followed to avoid dependence on any single industry. but related. products or services. Horizontal and conglomerate.Types of Strategies Major competitors offer better -quality products at comparable prices. especially when the company is competing in an un attractive industry. Organization competes in a high-growth industry. Concentric Diversification Acquiring new.
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 adding new but related products would significantly enhance the sales of current products. When an organization has strong management team. When new related products could be offered at highly competitive prices.
Organization competes in a highly competitive and / or a no growth industry yielding low returns and profit margins. . Situation when Horizontal Diversifications may be an effective strategy. unrelated products or services for present customers. Revenue of the organization would increase significantly.Types of Strategies Horizontal Diversification Adding new. 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.
The existing markets for company¶s present products are saturated. . Organization has the capital and managerial talent to successfully compete in a new industry. Organization¶s basic industry is experiencing decline in sales / profits. unrelated products or services. Organization has the opportunity to purchase unrelated business providing an attractive investment opportunity. Situations when conglomerate diversification may be an effective strategy. There exists financial synergy between the acquired and acquiring firms.Types of Strategies Conglomerate Diversification Adding new. Antitrust action could be charged against an organization that has concentrated on a single industry.
. closing obsolete factories. reducing the number of employees and controlling expenses. is designed to fortify an organization¶s basic distinctive competence. allowing a firm to avoid major debt obligations and to void union contracts. pruning product lines. Entails selling off land and buildings to raise needed cash. Divestiture and Liquidation are defensive strategies. closing marginal businesses. Also called a turnaround or reorganization strategy. Bankruptcy can be an effective type of retrenchment strategy. . automating processes.Types of Strategies Defensive Strategies Retrenchment. Retrenchment An organization regroups through cost and asset reduction to reverse declining sales and profits.
. minimize external threats. Organization has grown so large so quickly that major internal reorganization is needed. low profitability. and pressure from stakeholders to improve performance. The organization is plagued by inefficiency. An organization has failed to meet it¶s objectives and goals repeatedly overtime. poor employee morale. could not capitalize on external opportunities.Types of Strategies Situations when retrenchment may be an effective strategy. The organization is a weaker competitor in the industry. The organization¶s strategic managers have failed. take advantage of internal strengths and overcome internal weaknesses overtime.
The strategy is used to raise capital for further strategic acquisition or investments. . or that do not fit well with the firm¶s other activities.Types of Strategies Divestiture Selling a division or part of an organization. that require too much capital. Divestiture can be apart of an overall retrenchment strategy to rid an organization of businesses that are unprofitable.
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. The organization has pursued a retrenchment strategy but failed to accomplish needed improvements. customers. A division is responsible for an organization¶s overall poor performance. managers. Government antitrust action threatens an organization . may be due to different markets. A division needs more resources to be competitive than the company can provide. A division is misfit with the rest of an organization. values or needs. employees.
When stockholders of a firm can minimize their losses by selling the organization¶s assets. than liquidation is the only way to orderly get max cash from firm¶s assets. for their tangible worth is called liquidation. Organization has pursued both a retrenchment strategy and divestiture strategy and both have failed. Situations when liquidation may be an effective strategy to pursue.Types of Strategies Liquidation Selling all of a company¶s assets. . Liquidities is a recognition of defeat and therefore. in parts. When only alternative left is bankruptcy. It is better to cease operating than to continue loosing large sums of money. can be an emotionally difficult strategy.
These strategies imply different organizational arrangements. cost leadership. 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. 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 Michael Porter¶s Generic Strategies. control procedures and incentive systems. Cost leadership emphasis on producing standardized products at a very low per unit cost for price sensitive consumers. . Strategies allow organizations to gain competitive advantage from three different bases.
It is an effective strategy in situations where customers are price sensitive. . buyer are not bothered about brands and there are large no.Types of Strategies Cost Leadership Strategy Reason for forward. backward and horizontal integration is to gain cost leadership. Pursue cost leadership in conjunction with differentiation. there is few ways of achieving product differentiation. of buyers with significant bargaining power. Perform cost-benefit analysis to evaluate ³sharing opportunities´ of resources and knowledge among firm¶s existing and potential business units.
buyer¶s interest switching to other differentiating features beside price.Types of Strategies Implies high efficiency. limited perks. intolerance of waste. lower overheads. rewards linked with cost containment. technology break through make strategy ineffective. Competitors imitation of strategy may result in lowering overall Industry profits. .
engineering design. Will allow a firm to charge high price. Strategy requires strong coordination between R&D and marketing functions. useful life. . product performance. gas mileage or ease of use.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. gain customer loyalty. spare parts availability. Special features could be superior service.
.Types of Strategies Focus Strategies To concentrate on a particular group of customers. geographic market. 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. 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. Focus Strategies are most effective when.
The possibility of many competitors recognizing the successful focus strategy and copying it. . Risks of pursuing Focus Strategies.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.
Other types of cooperative arrangements could be. . ± Cross-distribution agreements. ± Cross-licensing agreements. The sponsoring firms normally form a separate organization with shared ownership. ± Research and development partnerships.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.
if supported unequally.Managers who must collaborate daily in operating the venture are not involved in forming or shaping the venture. 3. The venture may not be supported equally by both partners. 2. Common Problems Leading To Failure Of Joint Ventures 1.The venture may begin to compete more with one of the partners than the other.Types of Strategies ± Cross-manufacturing agreements. . and ± Joint-bidding consortia. problems arise.
.when a large organization purchases (acquires) a smaller firm.If the acquisition is desired by both firms. Acquisition. Takeover/Hostile Takeover . or vice versa.When a merger or acquisition is not desired by both parties.Types of Strategies Merger / Acquisition Merger ± When two organizations of about equal size unite to form one enterprise. Friendly Merger .
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 make better use of the existing sales force. To gain economies of scale To smooth out seasonal trends in sales. products and creditors. . distributors. customers. To reduce managerial staff.Types of Strategies Reasons for Mergers and Acquisitions To provide improved capacity utilization. To gain access to new suppliers. 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.
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 organizational environment consists of the internal environment and the external environment.
THE ENVIRONMENT The macro-environment Industry Operating Envrnmt Internal Environment The organization Task Environment .
Scan Internal environment to ascertain strengths and weaknesses Monitor. evaluate and disseminate information from external and internal environment to the management.Strategic Management Process Environmental Scanning Scan external environment to identify possible opportunities and threats. Thus. It is a tool used by corporations to avoid strategic surprise and to ensure long-term health . .
IO perspective requires the firms to compete in attractive industries. the external (industry) factors are more important than internal factors in a firm achieving competitive advantage. . Competitive advantage is determined largely by competitive positioning within and industry. avoid weak or faltering industries. finance etc. 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.Strategic Management Process The Industrial Organization (IO) View According to IO approach.
product differentiation. structures. Research findings suggest that approximately 20 percent of a firm¶s profitability can be explained by the industry. and level of competitiveness than on internal resources. barriers to market entry.Strategic Management Process Firm performance is primarily based more on industry properties. and operations. such as economies of scale. capabilities. However. . whereas 36 percent of the profitability is attributed to the firm¶s internal factors.
Strategic Management Process Key External Forces: ± ± ± ± ± Economic forces. Distributors. Trade Associations. Markets and Natural Environment. Political. Social. Managers. Labor Unions. demographic and environmental forces. Employees. Organization¶s Operating Environment: Competitors. Services. Governments. governmental and legal forces. Stockholders. Technological forces. Creditors. cultural. Communities. Suppliers. Special interest groups. Products. . Customers. Competitive forces.
± The nature of positioning and market segmentation strategies.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. Changes in external forces is reflected into: ± Changes in consumer demand for both industrial and consumer products and services. . ± The choice of businesses to acquire or sell. External opportunities /threats enable organizations to develop clear missions and strategies to achieve their objectives.
List of key external factors be communicated to all in the organization.Strategic Management Process Get the participation of max. to identify key external factors which are. ± Applicable to all competing firms. Gather competitive intelligence about key external force¶s trends by using print/electronic media. ± Important for achieving long-term and annual objectives. ± Hierarchical effecting overall company and functional/ divisional areas. ± Measurable. number of managers and employees. human resources and internet. . Evaluate and assimilate the info.
stock prices. etc. Interest rates. . 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. OPEC.Strategic Management Process Economic Forces The Nature and direction of economy in which firm operates. 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. ± ± ± ± ± ± ± General availability of credit. The level of disposable income. The firm must consider.
Demographic and Environmental forces. markets and customers and all sorts of organizations. and all industries are challenged by the opportunities and threats arising from these changes. Cultural. demographic and environmental factors have impact on virtually all products. cultural. services. . Changes in social.Strategic Management Process Social.
state. rules for laying off employees . (Golden hand shake) under Govt. local and foreign governments are major regulators. subsidizers. Governmental and Legal Forces Federal. Companies have to pay heavy penalty in shape of expensive severance packages. Political. employers and customers of organizations.Strategic Management Process Political. governmental and legal factors can represent key opportunities or threats for both small and large organizations.
Strategic Management Process Political forecast is vital part of external audit for industries/ firms depending on Govt. contracts. import duty on raw materials. special tariffs can affect firms significantly. subsidies. Changes in tax rates. or markets for their products. Political forecasts is critical for multinational firms that depend on foreign countries for natural resources. facilities. companies relying only on domestic market may find it difficult to survive. Mass communication and high technology is creating similar patterns of consumption in diverse cultures world wide. .
erasing limitations of traditional geographical markets. 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. altering economies of scale and changing entry barriers. It is changing the nature of opportunities and threats by altering the life cycle of products. . increasing speed of distribution .
Strategic Management Process Technological forces represent major opportunities and threats which should be taken care of while formulating strategies. ± Products. ± Create shortage in technical skills. manufacturing processes. services. markets. customers. suppliers. Technological breakthroughs can dramatically affect. ± Change the relative cost position in an industry. ± Create new more powerful competitive advantage. operations. . ± Create shorter production runs. marketing practices and competitive position. ± Change values and expectations of employees. ± Render existing products and services obsolete. distributors. managers and customers.
objectives and strategies. ± Innovate or evaporate. . not just in product but the whole company. Characteristics of a competitive firm. The most-successful purchases are in niches that add technology or a related market. weaknesses. ± People make a difference. capabilities. threats.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. ± Market share. opportunities. ± There is no substitute for quality and no greater threat than failing to be cost-effective on a global basis. ± Bringing improvement. ± Acquisition is essential to growth. Nothing quite recedes like success. ± Understanding and remembering precisely what is your business.
. lower costs and better decision making. Benefits of corporate spying include increased revenues. Major competitor¶s weakness can represent external opportunity and major strength may represent key threat. Good competitive intelligence in business is one of the key to success. Competitive intelligence is equally applicable for strategy formulation.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. implementation and evaluation decisions.
newspaper articles. want ads. online interviews with celebrities and government filings. Identify areas in which competitors are vulnerable and assess the impact strategic actions would have on competitors. and computer break-ins should not be used in CI. Sources of CI Internet. Identify competitors potential moves that might endanger a firm¶s position in the market. wiretapping. managers. Cooperation Among Competitors Unethical tactics like bribery. suppliers. trade journals. customers. distributors. employees.Strategic Management Process Objectives of Competitive Intelligence (CI) To provide general understanding of an industry and its competitors. . creditors.
Potential entry of new competitors. A widely used approach for developing strategies in many industries.Strategic Management Process Industry Environment Competitive Analysis: Porter¶s Five-Forces Model. According to Model. Bargaining power of suppliers. ± ± ± ± ± Rivalry among competing firms. Bargaining Power of consumers. . Potential development of substitute products. the nature of competitiveness in a given industry can be viewed as a composite of five forces.
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 .
adding features. ± By becoming more equal in size and capability. Change in strategy by one firm may be met with retaliating countermoves like lowering of prices. A successful strategy giving competitive advantage to a firm can be pursued by rival firms. . extending warranties or increasing advertising. enhancing quality. The intensity of rivalry increases. ± with the increase in number of competitors. providing services.Strategic Management Process Rivalry among Competing firms The most powerful of five Competitive forces.
± Barriers to leaving the market are high. ± when product is perishable. As rivalry among competing firms intensifies.Strategic Management Process -With decrease in demand of industry¶s products. _ Consumers can switch brands easily. . ± When fixed costs are high. ± When mergers and acquisitions are common in the industry. ± The industry becomes Inherently unattractive. ± Industry¶s profits decline.
strong brand preference.Strategic Management Process Potential Entry of New Competitors Easy entry of a firm in an industry. large capital requirement. possession of patents. strong customer loyalty. Govt. undesirable locations. sophisticated technology and know how. counterattack by entrenched firms or potential saturation of the market: . Barriers to entry include. Economy of scale. increases the intensity of competitiveness among the firms. lack of access to raw materials. regulatory policies.
plan counter attack if required and capitalize on existing strengths and weaknesses. ± Substantial market resources. ± High quality products. . their strategies. Strategist must identify new entrants.Strategic Management Process New firms enter the industry with. ± lower prices.
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. competitive pressure arise when price of the substitute product decreases or consumer¶s switching cost decreases. like plastic container producer competing with glass. Presence of substitute put ceiling on the price of a product. or aluminum can producer. . paperboard. Competitive strength of the substitute product could be measured by its market share.
This strategy is effective when suppliers are unreliable. ± There is large number of suppliers. ± When cost of switching raw materials is high.Strategic Management Process Bargaining Power of Suppliers It affects the intensity of competition in industry when. too costly or not capable of meeting a firm¶s demand on consistant bases. Firms may pursue a backward integration strategy to gain control or ownership of suppliers. ± There are only few substitute raw materials. .
Strategic Management Process Bargaining Power of Consumers Intensity of competition in an industry increases by the bargaining power of consumers if. Consumers can negotiate selling price. . ± Buy in volume. Rival firms offer extended warranties or special services to gain consumer loyalty. warranty coverage. ± Products being purchased are standard or undifferentiated. ± Consumers are concentrated or large. and accessory packages.
The Matrix can be developed in five steps.Strategic Management Process The External Factor Evaluation (EFE) Matrix The matrix allows the strategists to summarize and evaluate economic. political. demographic. . governmental. by writing opportunities first and than threats. cultural. environmental. technological. ± i) List external factors identified in external audit (about 10 to 20 factors) including both opportunities and threats. social. legal. and competitive information.
Strategic Management Process ± ii) Assign each factor a weight ranging from 0. 3 = the response is above average. The weight indicates the relative importance of that factor in success of the firm¶s industry. and 1 = the response is poor.0 (not important) to 1. 4 = the response is superior. where. 2 = the response is 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. 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 1.0.0 (very important).
5. The highest possible total weighted score for an organization is 4. ± v) Sum the weighted score for each variable to determine the total weighted score for the organization.Strategic Management Process Ratings are based on effectiveness of the firm¶s strategies thus company-based. whereas the weights in step 2 are industry based.0 and the lowest 1. . The score of 4. or taking advantage of opportunities and minimizing effects of threats.0 indicates that the organization is responding in an outstanding way to existing opportunities and threats in its industry. ± iv) Multiply each factor¶s weight by its rating to determine a weighted score. The average total weighted score is 2.0.
20 .40 .05 .05 .Strategic Management Process A SAMPLE INTERNAL FACTOR EVALUATON MARTRIX Key Internal Factors Internal Strength Largest Casino in country Room Occupancy 95% in L.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 .15 .10 .05 .60 .15 .05 .05 .05 .05 4 4 3 4 3 3 4 3 3 .15 .15 .15 .15 .20 .
not high Recent loss of joint venture Total Weight Rating Weighted Score .10 1.10 2.10 .Strategic Management Process Key Internal Factors Internal Weaknesses Most properties located in L.05 .05 .05 .05 .00 1 2 2 1 .75 .10 .V Little diversification Family reputation.
The weights and total weighted scores in both a CPM and EFE have the same meaning. therefore the ratings refer to strengths and weaknesses. where. Critical success factors in a CPM include both internal and external issues. However. ± 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.
technological advantages and e-commerce expertise. could be. management. union relations. Other than critical success factors. experience. proprietary or patent advantages. production capacity and efficiency. breadth of product line. location of facilities.Strategic Management Process For example critical success factors for firms may include advertising. financial position customer loyalty. global expansion and market share. effectiveness of sales distribution. . product quality. price competitiveness.
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. Involvement of representatives of managers and employees from throughout the firm to determine firm¶s internal strengths and weaknesses . ± Strategy be carefully executed. Three critical ingredients of a successful strategy. provide the basis for establishing objectives and strategies. ± Strategy be consistent with conditions in competitive environment. ± Strategy to place realistic requirements on the firm¶s resources.
. technology. Three Basic Resources Physical resources. internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage.Strategic Management Process The Resource-Based View (RBV) According to RBV approach. The organizational performance will primarily be determined by internal resources. location. human resources. which can be grouped into three categories. and organizational resources. Physical Resources Plant and equipment. raw materials and machines.
training. accumulated experience within organization and so on. databases.Strategic Management Process Human Resources All employees. knowledge. amount. planning processes. copyrights. patents. information systems. . skills. type. and abilities Organizational Resources Firm structure. trademarks. intelligence. The firm must consider the mix. and nature of a firm¶s internal resources first in devising strategies that can lead to sustainable competitive advantage. experience. RBV theory asserts that sources are actually what helps a firm exploit opportunities and neutralize threat.
abilities and ways of combining assets. people. . becomes the basis for lasting competitive advantage. and processes that a company uses to transform inputs into outputs. nurtured and deployed throughout the firm. either with greater efficiency in the processes or greater quality in the output or both. Core Competence A capability or skill running through a firm¶s businesses and that once identified.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. Finely developed capabilities can be a source of sustained competitive advantage.
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. competitors will match or better any resource sooner than later. ± Cash. ± Commodities. .
. ± Reputation for fairness. ± capacity ± Economy of scale Difficult to Imitate ± Brand loyalty. ± Employee Satisfaction.Strategic Management Process Can be imitated (but may not be). ± Patents. ± Unique locations. Cannot be Imitated. ± Unique assets (mineral rights).
Involves identifying and evaluating firm¶s resources that possess strategic value and can provide basis for future competitive advantage.Strategic Management Process Durability: How rapidly will the resource depreciate? Substitutability: Are other alternatives available? Using Resource.Based View in Internal Analysis. .
Separating tangible and intangible assets as well as organizational capabilities can uncover value-building resources and activities. Use value chain approach to identify capabilities. Look at organizational processes and combinations of resources and not only at isolated assets or capabilities.Strategic Management Process Methods to identify resources with strategic value. Utilize a functional perspective. activities and processes having potential competitive advantage. . Disaggregate resources: Break them into more specific competencies rather than stay with broad categorizations.
Providing ease of access ± Parking (where appropriate). window decorations ± Table layout Table materials . Theme. ± Features/décor. ± External Signs/ welcome Offering a delightful ambiance ± Floor design. ± Bar positioning. floor materials. color scheme. ± Door Positioning and style.Strategic Management Process Disaggregating a Restaurant¶s Customer Service Resource.
. ± 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.
Menu training. ± System of gaining waiter¶s attention .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. coaching process Discipline system. Daily Meetings. Job experience Motivation awards.
. ± 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. ± Kitchen queuing system ± Service standards Reducing the pain of paying the bill.
ceremonies. heroes. metaphors. legends. and feel. and that has worked well enough to be considered valid and to be taught to new members as the correct way to perceive. symbols. saga. myths. rituals.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. language. . thing. and heroines. stories. Cultural products or dimensions include values. This definition emphasizes the importance of matching external with internal factors in making strategic choices. beliefs. rites.
aggressive. innovative. The strategic management process takes place largely within a particular organization culture. or likable. friendly. harsh. liberal. and evaluation activities. implementation. An organization¶s culture must support the collective commitment of its people to a common purpose. It must foster competence and enthusiasm among managers and employees . conservative.Strategic Management Process These dimensions are levers that strategists can use to influence and direct strategy formulation. Every organization like an individual¶s personality have different cultures ± they could be warm. open.
and evaluation of strategies. If strategies can capitalize on cultural strengths. strategic changes may be ineffective or even counterproductive. like strong work ethic or highly ethical beliefs. If the firm¶s culture is not supportive. . then management can implement changes swiftly.Strategic Management Process Organizational culture significantly affects business decisions and thus must be evaluated during an internal strategic management audit. However. 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.
but seldom produce intended. Ceremonial ± A system of several rites connected with a single occasion or event. detail set of techniques and behaviors that manage anxieties. carried out through social interactions. an unquestioned belief about the practical benefits of certain techniques and behaviors that is not supported by facts. technical consequences of practical importance.Relatively elaborate. usually used to explain origins or transformation of something.Strategic Management Process Cultural Products or Dimensions Rites . Also. Myth ± A dramatic narrative of imagined events. Ritual ± A standardized. . dramatic. planned sets of activities that consolidate various forms of cultural expressions into one event. usually for the benefit of an audience.
event. .Strategic Management Process Saga ± A historical narrative describing the unique accomplishments of a group and its leaders. usually by representing another thing. usually in heroic terms. Legend ± A handed down narrative of some wonderful event that is based on history but has been blown up with fictional details. Story ± A narrative based on true events. or relation that serves as a vehicle for conveying meaning. sometimes a combination of truth and fiction. act. Symbol ± Any object. Folktale ± A completely fictional narrative. Language ± A particular form or manner in which members of a group use sounds and written signs to convey meanings to each other.
Heroes/Heroines ± Individuals whom the organization has legitimized to model behavior for others. Belief ± An understanding of a particular phenomenon. Values .Strategic Management Process Metaphors ± Shorthand words used to capture a vision or to reinforce old or new values. .life-directing attitudes that serve as behavioral guidelines.
motivating. Planning enables a firm to take into account relevant factors and focus on the critical ones. 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. organizing. Planning is an up-front investment in success. planning. staffing. . Planning The only thing certain about the future of any organization is change. and controlling.Strategic Management Process Management The function of management are five basic activities.
and how needed to achieve desired objectives. where. Successful organizations strive to control their own futures rather than merely react to external forces and events as they occur. Strategic management can be viewed as a formal planning process that allows an organization to pursue proactive rather than reactive strategies. what.Strategic Management Process Planning enables a firm to identify precisely what is to be achieved and to detail precisely the who. . why. when. Planning helps ensure that the firm can be prepared for all reasonable eventualities and for all changes that will be needed.
Strategic Management Process Organizing The purpose of organizing is to achieve coordinated efforts by defining tasks and authority relationship. ± Combining jobs to form departments ( departmentalization). ± Breaking tasks down into jobs ( work specialization ). Resources are allocated more effectively and used more efficiently in a well organized firm than in a disorganized firm. . and ± Delegation authority. Organizing means determining who does what and who reports to whom. The organization function consist of three sequential activities.
which lead to specialization and according to Adam Smith (Wealth of Nations published 1776) would lead to higher productivity. or merged. and chain of command. business unit. strategic. and matrix. . Combining jobs to form departments results in an organizational structure. deleted.Strategic Management Process Breaking tasks down into jobs require development of job description and job specification. divisional. span of control. The most common forms of departmentalization are functional. Changes in strategy often require changes in structure because positions may be created.
and to be held accountable for results Delegation of authority is embedded in strategic management process. . Employees of today are more educated and capable of participation in organizational decision making. They expect to be delegated authority and responsibility.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. Objectives are commonly stated in terms of.Strategic Management Process Strategic Objectives Strategic objectives or long-term objectives represent the results expected from pursuing certain strategies. understandable. . measurable. hierarchical. Profitability. ± ± ± ± ± ± ± Growth in assets. realistic. Degree and nature of diversification. and obtainable. Growth in sales. Objectives should be quantitative. Market share. challenging.
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.
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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. Ethical Behavior Conduct that is considered µright¶ or µgood¶ in the context of a governing moral code.Internal Environment Analysis Business Ethics and Social Responsibility Ethics A system of behaviors. but also to broader set of moral principles expected by all or by a segment of society. . It conforms not only to the law.
Ethical Standard A guidelines governing moral conduct of a particular group. ethical principles. . and ethical rules.Code Of Ethics A formal statement of the organization¶s values.
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