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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.
friends neighbors etc. ± It has transferred power from businesses to individuals .may lead to regulation on consumers in future. ± Buyers can get best price and service by quickly scanning hundreds of vendor offerings. ± It promotes endless comparison shopping thus enabling consumers worldwide to band together to demand discounts. .Evolution of Strategic Management Internet and PCs are changing our lifestyle the way we interact with our families.
the Internet will change society more than telephone and television combined. e-Trade. ± According to seventy four percent Americans in a survey. e-commerce. ± Slogans and company¶s like e-Bay.Evolution of Strategic Management Internet has changed the economics of business in every single industry worldwide. ± Business to Business e-commerce is five time greater than consumer e-commerce. e-mail and e-toys have become integral part of everyday life worldwide. .
The purpose of strategic management is to exploit and create new and different opportunities for tomorrow. production /operations. marketing. . finance/ accounting. It focuses on integrating management. and computer information systems to achieve organizational objectives.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.
logical. systematic approach for making major decisions in an organization. Three stages of Strategic Management Process. . ± Strategy evaluation. generating alternative strategies and choosing particular strategy to pursue.Strategic Management Process Strategic Management Process It is an objective. determining internal strengths and weaknesses. Strategy Formulation Developing a vision and mission. It attempts to organize qualitative and quantitative information in a way that allows effective decision making under uncertainty. establishing long term objectives. identifying an organization¶s external opportunities and threats. ± Strategy implementation. ± Strategy formulation.
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. and being the best is what Atlanta Web pledges to work hard at being ± every day. ³ To be the first choice in the printed communication business. The first choice is the best choice.
it is a declaration of an organization¶s ³ reason for being ³answering the pivotal question ³ what is our business´.Strategic Management Process Mission Statement An enduring statement of purpose that distinguishes one organization from other similar enterprise. . A clear mission statement is essential for effectively establishing objectives and formulating strategies. .
or standard.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. time and performance parameters can be assessed and controlled. for allocating organizational resources. Provide a basis. Specify organization¶s purpose and then translate these into objectives in such a way that cost. .
They are largely beyond the control of a single organization-thus the word external. social. cultural. technological or competitive trends. .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. legal. Firms to formulate strategies to take advantage of external opportunities and to avoid/reduce the impact of external threats. environmental. political. governmental.
They arise in the management.Strategic Management Process Internal Strengths and weaknesses An organization¶s controllable activities that are performed especially well or poorly. 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. . production/ operations. finance/accounting.
measuring performance and comparing to past periods and industry averages.Strategic Management Process Strengths and weaknesses are determined relative to competitors. production efficiency. Internal factors can be determined by computing ratios. Survey method could be used to determine employee morale. advertising effectiveness and customer loyalty. 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.
measurable. reasonable and clear. Objectives state direction. motivating and controlling activities. focus coordination and provide a basis for effective planning. consistent. create synergy.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. aid in evaluation. organizing. reveal priorities. . Objectives should be challenging.
diversification.oriented having multifunctional or multidivisional consequences for the organization. liquidation and joint venture. acquisition.Strategic Management Process Strategy It is the means by which long-term objectives can be achieved. Strategies are potential actions thus future. market penetration. Business strategies may include geographic expansion. retrenchment. . product development.
Whether to enter international market.Strategic Management Process Strategy formulation issues Deciding what new business to enter What businesses to close. How to allocate resources. Whether to expand operations or diversify. Whether to merge or form a joint venture How to avoid a hostile takeover. .
It entails establishment of annual objectives. devise policies. Developing a strategy-supporting culture Creating an effective organizational structure. Developing and utilizing information systems. and Linking employee compensation to organizational performance . Strategy Implementation includes. Preparing budget. motivate employees. and allocate resources so that formulated strategies can be executed.Strategic Management Process Strategy Implementation It is also called ³the action stage of strategic management´. Redirecting marketing efforts.
requires special motivation and leadership skills . Strategy formulation ± positioning forces before the action Strategy implementation ± managing forces during the action Strategy formulation .Strategic Management Process Implementing Strategies Strategy implementation is different than strategy formulation.focuses on efficiency Strategy formulation ± primarily an intellectual process Strategy implementation ± primarily an operational process strategy formulation .requires good intuitive and analytical skills Strategy implementation .focuses on effectiveness Strategy implementation .
for profit or nonprofit organizations Strategy implementation . large.concepts and tools similar for small.varies substantially among different types and sizes of organizations .requires coordination among a few individuals Strategy implementation .Strategic Management Process Strategy formulation .requires coordination among many individuals Strategy formulation .
± Taking corrective actions. ± Review external and internal environment factors which are bases for current strategies. ± Measuring performance. All strategies are subject to future modifications because of persistent changes in the external and internal environment of an organization. Three fundamental strategy evaluation activities are. Strategy evaluation is necessary because success today is no guarantee of success tomorrow .Strategic Management Process Strategy Evaluation It is the means for management to determine whether the strategy is working or otherwise.
Determine the logical sequence of steps. Program A complex single-use plan consisting of a set of interrelated actions aimed at achieving a one-time major goal. ± 1. ± 3. managers. To develop a program. ± 2. Establish and provide the sources necessary to complete each step. . Two common types of single-use plans are programs and projects. The plan becomes obsolete when its one-time goals have been achieved.Strategic Planning Types of Plans Single use plan A plan designed to fit one-time situation. Decide who will be responsible for each step. Divide the course of action into steps. ± 4.
Project A single-use plan that is narrower in scope than a program and aimed at achieving a specific one-time goal. . 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. Three commonly used types of standing plans are policies. and rules.Strategic Planning -5. procedures. Prepare a schedule for implementation. Standing plans A plan for guiding management decisions and activities in situations that recur repeatedly. for example. Gauge the time needed to finish each step. and ± 6.Policy ± a standing plan that provides broad guidelines for directing managerial activities in pursuit of organizational goals .
± 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. . 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
Businesses show significant improvement in sales. These firms generally exhibit superior long-term financial performance relative to their industry. .Strategic Planning Benefits of Strategic Planning Financial Benefits Organizations using strategic management concepts are more profitable and successful than those who do not. High performing firms do systematic planning to prepare for future fluctuations in their external and internal environment. profitability and productivity.
Strategic management enhances the problem-prevention capabilities of organizations because it promotes interaction among managers at all divisional and functional levels. . Increased employee productivity.Strategic Planning Nonfinancial Benefits Strategic management offers. Enhanced awareness of external threats An improved understanding of competitors¶ strategies. Reduced resistance to change. Clear understanding of performance-reward relationships.
Strategic Planning Benefits of Strategic Planning Allows for identification. prioritization and exploitation of opportunities. Presents a framework for improved coordination and control of activities. . avoiding piecemeal decision making. Allows more effective allocation of time and resources to identified opportunities. Facilitates managerial control through setting of standards for monitoring and measuring performance. Directs decision making to support established objectives. Provides a basis for clarifying individual responsibilities. Helps integrate the behavior of individuals into a total effort. Encourages forward thinking. Creates a framework for internal communication among personnel. and provides a unifying framework.
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. 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). Too Expensive ± culturally opposed to spending resources. Content with success ± they think no need to plan because things are fine as they stand.
Overconfidence ± as individuals amass experience.Strategic Planning Fear of failure ± not doing anything. no risk of failure. impractical. of aptitude with new system or of their ability to take on new roles. cumbersome. he/she sees anew plan as threat. Self-interest ± when some one has achieved status. there is some risk of failure. However. can also be done badly. or privilege through effectively using old system. Honest difference of opinion ± sincerely believe the plan is wrong as they are watching the situation from different viewpoing. they may rely less on formal planning. like anything else. being overconfident or overestimating experience can bring failure Prior bad experience ± plans have been long. However whenever something worthwhile is attempted. or inflexible. Fear of Unknown ± uncertain of abilities to learn new skills. Planning. .
.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´.
± Franchising . ± Establishing websites to sell products directly to consumers.costs and opportunities are spread across many individuals.. retail outlets . ± Opening company¶s stores.Types of Strategies Integration Strategies Forward integration Backwind integration Horizontal integration Forward Integration Gaining ownership or increased control over distributors or retailers by.
unreliable or incapable of meeting the firms distribution needs. firms having forward integration are availing competitive advantage. Availability of quality distributors is limited. Advantages of stable productions are high. When the industry is growing and expected to continue growing. Organizations present distributors are expensive. organizations can increase the predictability of the demand through forward integration. forward integration reduces organization¶s ability to diversify if it¶s basic industry falters. When profit margins for distributors or retailers are high.Types of Strategies Situations when forward integration may be an effective strategy. When organization has both the capital and human resources. however. .
. too costly or cannot meet firm¶s requirements Firms having global sources of supply opt for deintegration. 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. Global competition is prompting firm¶s to reduce number of suppliers and to demand higher level of service and quality from selected ones.
. When an organization has both capital and human resources to manage the new business of supplying its own raw material. when the number of suppliers is small and the number of competitors is large. unreliable.Types of Strategies Situations when backward integration may be an effective strategy When present suppliers are expensive. or incapable of meeting the firms needs. When an organization competes in an industry that is growing rapidly.
When an organization needs to acquire a needed resource quickly. When present supplies have high profit margin. 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. tempting to invest into the venture. .
. acquisitions and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies. Mergers.Types of Strategies Horizontal Integration A strategy of seeking ownership of or increased control over a firm¶s competitors. Mergers between direct competitors create efficiencies because of potential for eliminating duplicate facilities. It is increasingly being used by the firms as growth strategy.
. When increased economies of scale provide major competitive advantage.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).( not if competitors are doing poorly. 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. when a firm competes in a growing industry.
publicity efforts or offering extensive sales promotion items. . advertising expenditure. Market Penetration Market Development Product Development Market Penetration This strategy seeks to increase market share for present product or services in present markets through greater marketing efforts.Types of Strategies Intensive Strategies Requires intensive effort from the firm to improve it¶s competitive position with existing products. Market penetrations includes increasing number of salespersons.
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.Types of Strategies Situations when market penetration may be an effective strategy Current markets are not saturated with a particular product or service. . Market shares of major competitors have been declining while total industry sales have been increasing.
Organization¶s basic industry is becoming global. New untapped or unsaturated markets exist. Situations when market development may be an effective strategy New. Organization is very successful at what it does. .Types of Strategies Market Development It involves introducing present products or services into new geographic areas. Organization has the necessary resources to expand operations. reliable. Organization has excess production capacity. inexpensive and good quality channels of distribution are available.
.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. 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 Major competitors offer better -quality products at comparable prices. 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. . Concentric. Horizontal and conglomerate. Organization competes in a high-growth industry. especially when the company is competing in an un attractive industry. products or services. Concentric Diversification Acquiring new. but related.
When adding new but related products would significantly enhance the sales of current products. . When an organization has strong management team. When the company¶s products are in the declining stage of the product¶s life cycle. When new related products could be offered at highly competitive prices. When new related products have seasonal sales levels that counterbalance a company¶s existing peaks and lows.Types of Strategies Situations when Concentric diversification may be an effective strategy When an organization competes in a no-growth/ slowgrowth industry.
Revenue of the organization would increase significantly. Situation when Horizontal Diversifications may be an effective strategy. The new product has countercyclical sales patterns compared to an organization¶s present products. Organization¶s present marketing channels can be used to market new products to current customers. . Organization competes in a highly competitive and / or a no growth industry yielding low returns and profit margins.Types of Strategies Horizontal Diversification Adding new. unrelated products or services for present customers.
Organization has the capital and managerial talent to successfully compete in a new industry. There exists financial synergy between the acquired and acquiring firms. Situations when conglomerate diversification may be an effective strategy. Organization has the opportunity to purchase unrelated business providing an attractive investment opportunity.Types of Strategies Conglomerate Diversification Adding new. Organization¶s basic industry is experiencing decline in sales / profits. . unrelated products or services. Antitrust action could be charged against an organization that has concentrated on a single industry. The existing markets for company¶s present products are saturated.
Also called a turnaround or reorganization strategy. automating processes. is designed to fortify an organization¶s basic distinctive competence. Entails selling off land and buildings to raise needed cash. pruning product lines. closing marginal businesses. Retrenchment An organization regroups through cost and asset reduction to reverse declining sales and profits.Types of Strategies Defensive Strategies Retrenchment. allowing a firm to avoid major debt obligations and to void union contracts. Divestiture and Liquidation are defensive strategies. Bankruptcy can be an effective type of retrenchment strategy.. reducing the number of employees and controlling expenses. . closing obsolete factories.
The organization¶s strategic managers have failed. poor employee morale. could not capitalize on external opportunities. Organization has grown so large so quickly that major internal reorganization is needed. take advantage of internal strengths and overcome internal weaknesses overtime. The organization is plagued by inefficiency. The organization is a weaker competitor in the industry. and pressure from stakeholders to improve performance. low profitability. minimize external threats. An organization has failed to meet it¶s objectives and goals repeatedly overtime. .Types of Strategies Situations when retrenchment may be an effective strategy.
Types of Strategies Divestiture Selling a division or part of an organization. or that do not fit well with the firm¶s other activities. Divestiture can be apart of an overall retrenchment strategy to rid an organization of businesses that are unprofitable. The strategy is used to raise capital for further strategic acquisition or investments. . that require too much capital.
A large amount of cash is required quickly and cannot be obtained from other sources. Government antitrust action threatens an organization . values or needs. A division is responsible for an organization¶s overall poor performance. employees. customers. may be due to different markets. The organization has pursued a retrenchment strategy but failed to accomplish needed improvements. A division needs more resources to be competitive than the company can provide.Types of Strategies Situations when Divestiture may be an effective strategy. managers. A division is misfit with the rest of an organization.
for their tangible worth is called liquidation. It is better to cease operating than to continue loosing large sums of money. than liquidation is the only way to orderly get max cash from firm¶s assets. When only alternative left is bankruptcy. Situations when liquidation may be an effective strategy to pursue. can be an emotionally difficult strategy. . in parts. Organization has pursued both a retrenchment strategy and divestiture strategy and both have failed. Liquidities is a recognition of defeat and therefore. When stockholders of a firm can minimize their losses by selling the organization¶s assets.Types of Strategies Liquidation Selling all of a company¶s assets.
Strategies allow organizations to gain competitive advantage from three different bases. 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. Differentiation and focus. cost leadership. control procedures and incentive systems. These strategies imply different organizational arrangements. 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 emphasis on producing standardized products at a very low per unit cost for price sensitive consumers. .
backward and horizontal integration is to gain cost leadership. there is few ways of achieving product differentiation.Types of Strategies Cost Leadership Strategy Reason for forward. Perform cost-benefit analysis to evaluate ³sharing opportunities´ of resources and knowledge among firm¶s existing and potential business units. buyer are not bothered about brands and there are large no. It is an effective strategy in situations where customers are price sensitive. . Pursue cost leadership in conjunction with differentiation. of buyers with significant bargaining power.
limited perks. technology break through make strategy ineffective. rewards linked with cost containment. Competitors imitation of strategy may result in lowering overall Industry profits. . lower overheads.Types of Strategies Implies high efficiency. buyer¶s interest switching to other differentiating features beside price. intolerance of waste.
. Will allow a firm to charge high price.Types of Strategies Differentiation Strategy. spare parts availability. Special features could be superior service. gas mileage or ease of use. Follow a strategy after careful study of buyers needs and preferences to determine and incorporation of one or more differentiations features. gain customer loyalty. Strategy requires strong coordination between R&D and marketing functions. useful life. product performance. engineering design.
. 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. ± Consumers have distinctive preferences or requirements. Market Penetration and Market Development strategies offer substantial focusing advantages.Types of Strategies Focus Strategies To concentrate on a particular group of customers. ± Rival firms are not attempting to specialize in the same target market. Focus Strategies are most effective when. geographic market.
Risks of pursuing Focus Strategies. The consumer preferences drifting towards the product attributes desired by the market as a whole.Types of Strategies Medium to large firms can pursue focus strategies only in conjunction with differentiation or cost leadership-based strategies. The possibility of many competitors recognizing the successful focus strategy and copying it. .
Other types of cooperative arrangements could be. ± Cross-distribution agreements. ± Cross-licensing agreements. ± 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. The sponsoring firms normally form a separate organization with shared ownership.
and ± Joint-bidding consortia.Types of Strategies ± Cross-manufacturing agreements. if supported unequally.Managers who must collaborate daily in operating the venture are not involved in forming or shaping the venture. Common Problems Leading To Failure Of Joint Ventures 1.The venture may begin to compete more with one of the partners than the other. The venture may not be supported equally by both partners. . 2. problems arise. 3.
.Types of Strategies Merger / Acquisition Merger ± When two organizations of about equal size unite to form one enterprise.When a merger or acquisition is not desired by both parties.when a large organization purchases (acquires) a smaller firm.If the acquisition is desired by both firms. or vice versa. Takeover/Hostile Takeover . Acquisition. Friendly Merger .
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) .
To gain economies of scale To smooth out seasonal trends in sales. customers. To reduce managerial staff.Types of Strategies Reasons for Mergers and Acquisitions To provide improved capacity utilization. products and creditors. To gain access to new suppliers. 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 .
evaluate and disseminate information from external and internal environment to the management. Scan Internal environment to ascertain strengths and weaknesses Monitor.Strategic Management Process Environmental Scanning Scan external environment to identify possible opportunities and threats. . It is a tool used by corporations to avoid strategic surprise and to ensure long-term health . Thus.
.Strategic Management Process The Industrial Organization (IO) View According to IO approach. finance etc. avoid weak or faltering industries. IO perspective requires the firms to compete in attractive industries. 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. Competitive advantage is determined largely by competitive positioning within and industry. and gain a full understanding of key external factors relationships within that industry. the external (industry) factors are more important than internal factors in a firm achieving competitive advantage.
Strategic Management Process Firm performance is primarily based more on industry properties. such as economies of scale. structures. However. . and operations. and level of competitiveness than on internal resources. barriers to market entry. capabilities. whereas 36 percent of the profitability is attributed to the firm¶s internal factors. product differentiation. Research findings suggest that approximately 20 percent of a firm¶s profitability can be explained by the industry.
Competitive forces. demographic and environmental forces. . cultural. Trade Associations. Communities. Technological forces. Suppliers. Stockholders. Markets and Natural Environment. Services. Customers. Products. Political. Governments. governmental and legal forces. Labor Unions. Special interest groups. Employees.Strategic Management Process Key External Forces: ± ± ± ± ± Economic forces. Managers. Organization¶s Operating Environment: Competitors. Social. Creditors. Distributors.
± 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.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. External opportunities /threats enable organizations to develop clear missions and strategies to achieve their objectives. ± The choice of businesses to acquire or sell.
± Important for achieving long-term and annual objectives. ± Applicable to all competing firms. Evaluate and assimilate the info. ± Measurable. Gather competitive intelligence about key external force¶s trends by using print/electronic media. ± Hierarchical effecting overall company and functional/ divisional areas.Strategic Management Process Get the participation of max. to identify key external factors which are. number of managers and employees. human resources and internet. . List of key external factors be communicated to all in the organization.
Strategic Management Process Economic Forces The Nature and direction of economy in which firm operates. OPEC. 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. . 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. etc. NAFTA. The level of disposable income. The firm must consider. stock prices. ± ± ± ± ± ± ± General availability of credit.
. demographic and environmental factors have impact on virtually all products. services. Cultural. Changes in social. cultural. and all industries are challenged by the opportunities and threats arising from these changes. markets and customers and all sorts of organizations.Strategic Management Process Social. Demographic and Environmental forces.
employers and customers of organizations. state. local and foreign governments are major regulators. governmental and legal factors can represent key opportunities or threats for both small and large organizations. subsidizers. (Golden hand shake) under Govt. rules for laying off employees . Political.Strategic Management Process Political. Companies have to pay heavy penalty in shape of expensive severance packages. Governmental and Legal Forces Federal.
import duty on raw materials. facilities. Political forecasts is critical for multinational firms that depend on foreign countries for natural resources. companies relying only on domestic market may find it difficult to survive. contracts. special tariffs can affect firms significantly. Changes in tax rates.Strategic Management Process Political forecast is vital part of external audit for industries/ firms depending on Govt. . Mass communication and high technology is creating similar patterns of consumption in diverse cultures world wide. subsidies. or markets for their products.
increasing speed of distribution . . erasing limitations of traditional geographical markets. Internet is saving companies billions of dollars in distribution and transaction from direct sales. altering economies of scale and changing entry barriers.Strategic Management Process Technological Forces Technological advances have brought revolution in business operations. It is changing the nature of opportunities and threats by altering the life cycle of products. New positions of CIO and CTO are being introduced in companies to effectively capitalize on e-commerce.
distributors. ± Create shortage in technical skills. ± Products. Technological breakthroughs can dramatically affect. ± Create new more powerful competitive advantage. ± Change values and expectations of employees. marketing practices and competitive position. . ± Create shorter production runs. suppliers. services. operations. markets. customers. ± Render existing products and services obsolete.Strategic Management Process Technological forces represent major opportunities and threats which should be taken care of while formulating strategies. managers and customers. ± Change the relative cost position in an industry. manufacturing processes.
The most-successful purchases are in niches that add technology or a related market. ± Innovate or evaporate. capabilities.Strategic Management Process Competitive Forces It is imperative in external audit to identify rival firms and determine their strengths. ± Bringing improvement. ± Understanding and remembering precisely what is your business. Characteristics of a competitive firm. ± People make a difference. ± There is no substitute for quality and no greater threat than failing to be cost-effective on a global basis. opportunities. ± Market share. ± Acquisition is essential to growth. . weaknesses. threats. tired of hearing it? Too bad. not just in product but the whole company. objectives and strategies. Nothing quite recedes like success.
Benefits of corporate spying include increased revenues. lower costs and better decision making.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. 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.
. online interviews with celebrities and government filings. and computer break-ins should not be used in CI. distributors. Cooperation Among Competitors Unethical tactics like bribery. wiretapping. Identify competitors potential moves that might endanger a firm¶s position in the market. customers. suppliers. Identify areas in which competitors are vulnerable and assess the impact strategic actions would have on competitors. employees. trade journals. creditors. managers. want ads. Sources of CI Internet.Strategic Management Process Objectives of Competitive Intelligence (CI) To provide general understanding of an industry and its competitors. newspaper articles.
A widely used approach for developing strategies in many industries. . Bargaining power of suppliers. Bargaining Power of consumers. ± ± ± ± ± Rivalry among competing firms. Potential entry of new competitors. the nature of competitiveness in a given industry can be viewed as a composite of five forces. According to Model.Strategic Management Process Industry Environment Competitive Analysis: Porter¶s Five-Forces Model. Potential development of substitute products.
Michael Porter¶s Model POTENTIAL ENTRANTS Threat of new entrants INDUSTRY COMPETITORS Bargaining power of suppliers SUPPLIERS Bargaining power of customers CUSTOMS Rivalry Among Existing Firms Threat of substitute products or services SUBSTITUTES .
Strategic Management Process Rivalry among Competing firms The most powerful of five Competitive forces. . A successful strategy giving competitive advantage to a firm can be pursued by rival firms. extending warranties or increasing advertising. ± with the increase in number of competitors. Change in strategy by one firm may be met with retaliating countermoves like lowering of prices. providing services. The intensity of rivalry increases. adding features. ± By becoming more equal in size and capability. enhancing quality.
As rivalry among competing firms intensifies. . ± When fixed costs are high. ± Barriers to leaving the market are high. ± When mergers and acquisitions are common in the industry. ± Industry¶s profits decline. ± The industry becomes Inherently unattractive. ± when product is perishable.Strategic Management Process -With decrease in demand of industry¶s products. _ Consumers can switch brands easily.
undesirable locations. possession of patents. regulatory policies. strong brand preference. strong customer loyalty.Strategic Management Process Potential Entry of New Competitors Easy entry of a firm in an industry. sophisticated technology and know how. Barriers to entry include. Economy of scale. large capital requirement. lack of access to raw materials. increases the intensity of competitiveness among the firms. counterattack by entrenched firms or potential saturation of the market: . Govt.
Strategic Management Process New firms enter the industry with. ± High quality products. their strategies. . ± lower prices. Strategist must identify new entrants. ± Substantial market resources. plan counter attack if required and capitalize on existing strengths and weaknesses.
competitive pressure arise when price of the substitute product decreases or consumer¶s switching cost decreases. 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. Competitive strength of the substitute product could be measured by its market share. Presence of substitute put ceiling on the price of a product. like plastic container producer competing with glass. . or aluminum can producer.
This strategy is effective when suppliers are unreliable.Strategic Management Process Bargaining Power of Suppliers It affects the intensity of competition in industry when. ± When cost of switching raw materials is high. Firms may pursue a backward integration strategy to gain control or ownership of suppliers. ± There is large number of suppliers. too costly or not capable of meeting a firm¶s demand on consistant bases. . ± There are only few substitute raw materials.
warranty coverage.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. and accessory packages. ± Products being purchased are standard or undifferentiated. Rival firms offer extended warranties or special services to gain consumer loyalty. Consumers can negotiate selling price. ± Buy in volume. .
The Matrix can be developed in five steps. political. 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. social. environmental. cultural. legal. and competitive information. technological. demographic.Strategic Management Process The External Factor Evaluation (EFE) Matrix The matrix allows the strategists to summarize and evaluate economic. governmental.
where. . 3 = the response is above average. 2 = the response is average.0 (very important).0 (not important) to 1. The total of all weight assigned to the factors must be equal 1. and 1 = the response is poor.0. The weight indicates the relative importance of that factor in success of the firm¶s industry. ± 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.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. 4 = the response is superior.
The score of 4. ± v) Sum the weighted score for each variable to determine the total weighted score for the organization. The highest possible total weighted score for an organization is 4. . The average total weighted score is 2.5. ± iv) Multiply each factor¶s weight by its rating to determine a weighted score.Strategic Management Process Ratings are based on effectiveness of the firm¶s strategies thus company-based.0.0 and the lowest 1.0 indicates that the organization is responding in an outstanding way to existing opportunities and threats in its industry. or taking advantage of opportunities and minimizing effects of threats. whereas the weights in step 2 are industry based.
15 .05 .05 .40 .10 .05 4 4 3 4 3 3 4 3 3 .60 .05 .15 .Strategic Management Process A SAMPLE INTERNAL FACTOR EVALUATON MARTRIX Key Internal Factors Internal Strength Largest Casino in country Room Occupancy 95% in L.05 .20 .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 .20 .05 .15 .15 .
05 .00 1 2 2 1 .75 .Strategic Management Process Key Internal Factors Internal Weaknesses Most properties located in L.10 1.05 .10 .05 .V Little diversification Family reputation. not high Recent loss of joint venture Total Weight Rating Weighted Score .10 .10 2.05 .
Strategic Management Process The Competitive Profile Matrix (CPM) The CPM identifies a firm¶s major competitors and its particular strengths and weaknesses in relation to a competitor firm¶s strategic position. therefore the ratings refer to strengths and weaknesses. The weights and total weighted scores in both a CPM and EFE have the same meaning. where. However. Critical success factors in a CPM include both internal and external issues. ± 4 = major strength ± 3 = minor strength ± 2 = minor weakness ± 1 = major weakness .
Strategic Management Process For example critical success factors for firms may include advertising. Other than critical success factors. price competitiveness. product quality. experience. technological advantages and e-commerce expertise. could be. proprietary or patent advantages. effectiveness of sales distribution. financial position customer loyalty. breadth of product line. . management. global expansion and market share. location of facilities. production capacity and efficiency. union relations.
± Strategy be carefully executed. provide the basis for establishing objectives and strategies. ± Strategy be consistent with conditions in competitive environment. Three critical ingredients of a successful strategy.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 to place realistic requirements on the firm¶s resources.
Strategic Management Process The Resource-Based View (RBV) According to RBV approach. Three Basic Resources Physical resources. location. technology. internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage. which can be grouped into three categories. The organizational performance will primarily be determined by internal resources. raw materials and machines. and organizational resources. . Physical Resources Plant and equipment. human resources.
and abilities Organizational Resources Firm structure. and nature of a firm¶s internal resources first in devising strategies that can lead to sustainable competitive advantage. RBV theory asserts that sources are actually what helps a firm exploit opportunities and neutralize threat. patents. databases. copyrights. amount. The firm must consider the mix. training. skills.Strategic Management Process Human Resources All employees. accumulated experience within organization and so on. experience. . information systems. intelligence. knowledge. trademarks. type. planning processes.
people. nurtured and deployed throughout the firm. and processes that a company uses to transform inputs into outputs. abilities and ways of combining assets. either with greater efficiency in the processes or greater quality in the output or both.Strategic Management Process Organizational Abilities The skills. Core Competence A capability or skill running through a firm¶s businesses and that once identified. becomes the basis for lasting competitive advantage. . 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.
± 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. ± Cash. Easy to imitate. .
Strategic Management Process Can be imitated (but may not be). . ± Employee Satisfaction. Cannot be Imitated. ± capacity ± Economy of scale Difficult to Imitate ± Brand loyalty. ± Patents. ± Unique locations. ± Unique assets (mineral rights). ± Reputation for fairness.
.Based View in Internal Analysis. 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.
activities and processes having potential competitive advantage. Disaggregate resources: Break them into more specific competencies rather than stay with broad categorizations. Separating tangible and intangible assets as well as organizational capabilities can uncover value-building resources and activities. Look at organizational processes and combinations of resources and not only at isolated assets or capabilities. . Use value chain approach to identify capabilities.Strategic Management Process Methods to identify resources with strategic value. Utilize a functional perspective.
Strategic Management Process Disaggregating a Restaurant¶s Customer Service Resource. window decorations ± Table layout Table materials . color scheme. Providing ease of access ± Parking (where appropriate). floor materials. Theme. ± Door Positioning and style. ± Bar positioning. ± External Signs/ welcome Offering a delightful ambiance ± Floor design. ± Features/décor.
± Marketing literature. ± Entertainment for queuers. ± Visible queuing system.Strategic Management Process Providing a Special welcome ± Host greeting ± Welcome drinks/ eats ± Menu introduction ± Table decoration Ensuing waiting time at the table is´ as expected´ and as enjoyable as possible. .
coaching process Discipline system. ± System of gaining waiter¶s attention . Job experience Motivation awards.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. Daily Meetings. Menu training.
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. ± Size of Menu ± Material Menus made off ± Menu dishes ± Menu layout Providing speed of service appropriate to the occasion.
rites. thing. Cultural products or dimensions include values. ceremonies. This definition emphasizes the importance of matching external with internal factors in making strategic choices. and heroines. beliefs. saga. and that has worked well enough to be considered valid and to be taught to new members as the correct way to perceive. symbols. stories. myths. . legends. language. 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. heroes. metaphors. and feel.
liberal. conservative. It must foster competence and enthusiasm among managers and employees . The strategic management process takes place largely within a particular organization culture. innovative.Strategic Management Process These dimensions are levers that strategists can use to influence and direct strategy formulation. open. friendly. or likable. harsh. 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. and evaluation activities. aggressive. implementation.
However. strategic changes may be ineffective or even counterproductive. implementation. If the firm¶s culture is not supportive. The challenge of strategic management is to bring about the changes in organizational culture and individual mindsets that are needed to support the formulation. like strong work ethic or highly ethical beliefs. 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. If strategies can capitalize on cultural strengths. and evaluation of strategies.
usually for the benefit of an audience. Myth ± A dramatic narrative of imagined events. dramatic. Ritual ± A standardized. an unquestioned belief about the practical benefits of certain techniques and behaviors that is not supported by facts. technical consequences of practical importance. . planned sets of activities that consolidate various forms of cultural expressions into one event.Strategic Management Process Cultural Products or Dimensions Rites . usually used to explain origins or transformation of something. carried out through social interactions. Ceremonial ± A system of several rites connected with a single occasion or event. Also.Relatively elaborate. but seldom produce intended. detail set of techniques and behaviors that manage anxieties.
. usually by representing another thing. usually in heroic terms.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. Story ± A narrative based on true events. Symbol ± Any object. Legend ± A handed down narrative of some wonderful event that is based on history but has been blown up with fictional details. event. 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. Folktale ± A completely fictional narrative.
Values .life-directing attitudes that serve as behavioral guidelines. Heroes/Heroines ± Individuals whom the organization has legitimized to model behavior for others. . Belief ± An understanding of a particular phenomenon.Strategic Management Process Metaphors ± Shorthand words used to capture a vision or to reinforce old or new values.
staffing. organizing. motivating. Planning enables a firm to take into account relevant factors and focus on the critical ones. Planning is an up-front investment in success. planning.Strategic Management Process Management The function of management are five basic activities. Planning The only thing certain about the future of any organization is change. Planning enables a firm to gather the resources needed and carry out tasks in the most efficient way. and planning is the essential bridge between the present and the future that increases the likelihood of achieving the desired results. . and controlling.
Successful organizations strive to control their own futures rather than merely react to external forces and events as they occur.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 can be viewed as a formal planning process that allows an organization to pursue proactive rather than reactive strategies. why. . where. Planning helps ensure that the firm can be prepared for all reasonable eventualities and for all changes that will be needed. when.
Organizing means determining who does what and who reports to whom. ± Combining jobs to form departments ( departmentalization). . and ± Delegation authority. The organization function consist of three sequential activities. Resources are allocated more effectively and used more efficiently in a well organized firm than in a disorganized firm.Strategic Management Process Organizing The purpose of organizing is to achieve coordinated efforts by defining tasks and authority relationship. ± Breaking tasks down into jobs ( work specialization ).
Changes in strategy often require changes in structure because positions may be created. divisional. and chain of command. . and matrix. deleted. or merged. span of control. which lead to specialization and according to Adam Smith (Wealth of Nations published 1776) would lead to higher productivity. business unit. The most common forms of departmentalization are functional.Strategic Management Process Breaking tasks down into jobs require development of job description and job specification. strategic. Combining jobs to form departments results in an organizational structure.
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´. . 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.
and obtainable.Strategic Management Process Strategic Objectives Strategic objectives or long-term objectives represent the results expected from pursuing certain strategies. Growth in sales. hierarchical. Market share. realistic. Objectives should be quantitative. Profitability. . Earning per share and Social responsibilities. understandable. Degree and nature of diversification. measurable. ± ± ± ± ± ± ± Growth in assets. challenging. Objectives are commonly stated in terms of.
By making objectives through consensus.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.
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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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Unethical Behavior Conduct that is considered µwrong¶ or µbad¶ in the context of a moral code. expectations and morals comprising standards of conduct for a population or profession. Ethical Behavior Conduct that is considered µright¶ or µgood¶ in the context of a governing 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 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. .