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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.
.Evolution of Strategic Management Internet and PCs are changing our lifestyle the way we interact with our families. ± It has transferred power from businesses to individuals .may lead to regulation on consumers in future. ± It promotes endless comparison shopping thus enabling consumers worldwide to band together to demand discounts. friends neighbors etc. ± Buyers can get best price and service by quickly scanning hundreds of vendor offerings.
. the Internet will change society more than telephone and television combined. e-mail and e-toys have become integral part of everyday life worldwide.Evolution of Strategic Management Internet has changed the economics of business in every single industry worldwide. ± Slogans and company¶s like e-Bay. e-Trade. e-commerce. ± According to seventy four percent Americans in a survey. ± Business to Business e-commerce is five time greater than consumer e-commerce.
. production /operations. research and development. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow. and computer information systems to achieve organizational objectives. finance/ accounting. marketing. It focuses on integrating management.Strategic Management Definition The art and science of formulating implementing and evaluating cross-functional decisions that enable an organization to achieve it¶s objectives.
Strategic Management Process Strategic Management Process It is an objective. ± Strategy evaluation. establishing long term objectives. systematic approach for making major decisions in an organization. . logical. generating alternative strategies and choosing particular strategy to pursue. identifying an organization¶s external opportunities and threats. It attempts to organize qualitative and quantitative information in a way that allows effective decision making under uncertainty. Three stages of Strategic Management Process. ± Strategy formulation. determining internal strengths and weaknesses. Strategy Formulation Developing a vision and mission. ± Strategy implementation.
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 Our vision is to take care of your vision´ A vision statement of Atlanta Web Printers. The first choice is the best choice. . ³ To be the first choice in the printed communication business.
A clear mission statement is essential for effectively establishing objectives and formulating strategies.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.
Provide a basis. Establish a general tone or organizational climate. . for allocating organizational resources.Strategic Management Process Importance of Vision and Mission Statements Ensure unanimity of purpose within the organization. Specify organization¶s purpose and then translate these into objectives in such a way that cost. or standard. Facilitate the translation of objectives in to work structure involving the assignment of tasks to responsible elements in organization. time and performance parameters can be assessed and controlled.
legal. demographic. social.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. technological or competitive trends. cultural. governmental. . They are largely beyond the control of a single organization-thus the word external. political.
finance/accounting. research and development and management information system activities of a business. production/ operations.Strategic Management Process Internal Strengths and weaknesses An organization¶s controllable activities that are performed especially well or poorly. Organizations strive to pursue strategies that capitalize on Internal strengths and eliminate internal weaknesses. marketing. They arise in the management. .
production efficiency. Internal factors can be determined by computing ratios. 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.Strategic Management Process Strengths and weaknesses are determined relative to competitors. Survey method could be used to determine employee morale. measuring performance and comparing to past periods and industry averages. advertising effectiveness and customer loyalty.
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. measurable. reasonable and clear. create synergy. motivating and controlling activities. organizing. focus coordination and provide a basis for effective planning. Objectives should be challenging. Objectives state direction. consistent. . reveal priorities.
liquidation and joint venture.Strategic Management Process Strategy It is the means by which long-term objectives can be achieved. diversification. product development.oriented having multifunctional or multidivisional consequences for the organization. retrenchment. . market penetration. Strategies are potential actions thus future. acquisition. Business strategies may include geographic expansion.
Strategic Management Process Strategy formulation issues Deciding what new business to enter What businesses to close. . Whether to expand operations or diversify. Whether to enter international market. Whether to merge or form a joint venture How to avoid a hostile takeover. How to allocate resources.
Strategy Implementation includes. and Linking employee compensation to organizational performance . devise policies. motivate employees. Developing and utilizing information systems.Strategic Management Process Strategy Implementation It is also called ³the action stage of strategic management´. Preparing budget. Redirecting marketing efforts. It entails establishment of annual objectives. Developing a strategy-supporting culture Creating an effective organizational structure. and allocate resources so that formulated strategies can be executed.
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 .requires good intuitive and analytical skills Strategy implementation .focuses on effectiveness Strategy implementation .requires special motivation and leadership skills .focuses on efficiency Strategy formulation ± primarily an intellectual process Strategy implementation ± primarily an operational process strategy formulation .
varies substantially among different types and sizes of organizations . for profit or nonprofit organizations Strategy implementation .requires coordination among a few individuals Strategy implementation . large.Strategic Management Process Strategy formulation .concepts and tools similar for small.requires coordination among many individuals Strategy formulation .
Strategic Management Process Strategy Evaluation It is the means for management to determine whether the strategy is working or otherwise. All strategies are subject to future modifications because of persistent changes in the external and internal environment of an organization. ± Measuring performance. ± Review external and internal environment factors which are bases for current strategies. Strategy evaluation is necessary because success today is no guarantee of success tomorrow . ± Taking corrective actions. Three fundamental strategy evaluation activities are.
Strategic Planning Types of Plans Single use plan A plan designed to fit one-time situation. ± 1. Divide the course of action into steps. . The plan becomes obsolete when its one-time goals have been achieved. ± 3. Two common types of single-use plans are programs and projects. Establish and provide the sources necessary to complete each step. managers. Program A complex single-use plan consisting of a set of interrelated actions aimed at achieving a one-time major goal. Decide who will be responsible for each step. To develop a program. ± 2. ± 4. Determine the logical sequence of steps.
Bhasha Dam project in the national program of provision of electricity to the whole country. .Strategic Planning -5. and rules. Prepare a schedule for implementation. Standing plans A plan for guiding management decisions and activities in situations that recur repeatedly. Projects integrate fewer activities and resources than programs and are often developed as subunits of programs. Gauge the time needed to finish each step. Project A single-use plan that is narrower in scope than a program and aimed at achieving a specific one-time goal. and ± 6. procedures. Three commonly used types of standing plans are policies.Policy ± a standing plan that provides broad guidelines for directing managerial activities in pursuit of organizational goals . for example.
Contingency Plans Alternative courses of actions to be followed if unforeseen environmental shifts occur. ± Rule ± a standing plan specifying the circumstances in which certain activities can or cannot be performed. .Strategic Planning ± Procedure ± a standing plan encompassing a series of detailed steps to be followed in particular recurring situation.
3 years Operational Plans .1 year .5 years Tactical Plans .Strategic Planning Levels of Planning Strategic Tactical Operational General Time Period Considered for Plans Strategic Plans .
functions) Operational Goals/ Plans (departments and units) .The Managerial Pyramid Mission Strategic Goals/ Plans (organization as a whole) Tactical Goals/ Plans (major divisions.
Who Does the Planning?
Small businesses: ± Entrepreneurs do most of the planning. Large firms: ± Traditional: A central corporate planning group works with top management and each division to solicit, challenge, and refine the company¶s plan. ± Current: Planning is decentralized and includes the firms¶ product and divisional managers, aided by small headquarters advisory groups.
How to Develop a Plan
1. 2. 3. 4. 5. 6. Set an objective. Evaluate the situation. Determine the procedures. Set a timetable. Assign responsibility. Check the plan for feasibility and cost
WELL CONCEIVED PLANS MUST HAVE
1.Resources 2.Methods 3.Tasks 4.Sequence 5.Individuals 6.Location 7.Deadlines 8.Stop points 9.Measurement
profitability and productivity. . Businesses show significant improvement in sales. High performing firms do systematic planning to prepare for future fluctuations in their external and internal environment. 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.
Enhanced awareness of external threats An improved understanding of competitors¶ strategies. . Reduced resistance to change. Clear understanding of performance-reward relationships. Increased employee productivity. Strategic management enhances the problem-prevention capabilities of organizations because it promotes interaction among managers at all divisional and functional levels.Strategic Planning Nonfinancial Benefits Strategic management offers.
Creates a framework for internal communication among personnel. Provides a basis for clarifying individual responsibilities. Encourages forward thinking. 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. . and provides a unifying framework. avoiding piecemeal decision making. Presents a framework for improved coordination and control of activities. prioritization and exploitation of opportunities.Strategic Planning Benefits of Strategic Planning Allows for identification. Helps integrate the behavior of individuals into a total effort.
Waste of time ± see planning as waste of time since no marketable product is produced.Strategic Planning Reasons For No Strategic Planning By Firms Poor reward structure ± often fail to reward success but ready to punish for failure. Laziness ± may not want to put effort needed for planning. . ( 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. Fire-fighting ± busy in crisis management and not finding time to plan.
Honest difference of opinion ± sincerely believe the plan is wrong as they are watching the situation from different viewpoing. he/she sees anew plan as threat. Planning.Strategic Planning Fear of failure ± not doing anything. . they may rely less on formal planning. Self-interest ± when some one has achieved status. However. or inflexible. like anything else. Fear of Unknown ± uncertain of abilities to learn new skills. cumbersome. impractical. or privilege through effectively using old system. However whenever something worthwhile is attempted. of aptitude with new system or of their ability to take on new roles. Overconfidence ± as individuals amass experience. can also be done badly. being overconfident or overestimating experience can bring failure Prior bad experience ± plans have been long. no risk of failure. there is some risk of failure.
Types of Strategies Integration Strategies Intensive Strategies Diversification Strategies Defensive Strategies Michael Porter¶s Generic Strategies Strategy is choosing among the alternatives. you cant follow a combination strategy for too long. According to Hansen and Smith. . Strategic planning involves ³choices that risk resources´ and ³tradeoffs that sacrifice opportunity´.
± Establishing websites to sell products directly to consumers.costs and opportunities are spread across many individuals.Types of Strategies Integration Strategies Forward integration Backwind integration Horizontal integration Forward Integration Gaining ownership or increased control over distributors or retailers by. retail outlets .. ± Opening company¶s stores. ± Franchising .
When profit margins for distributors or retailers are high. however. Availability of quality distributors is limited. Advantages of stable productions are high. Organizations present distributors are expensive. forward integration reduces organization¶s ability to diversify if it¶s basic industry falters. When organization has both the capital and human resources.Types of Strategies Situations when forward integration may be an effective strategy. . When the industry is growing and expected to continue growing. organizations can increase the predictability of the demand through forward integration. unreliable or incapable of meeting the firms distribution needs. firms having forward integration are availing competitive advantage.
.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. 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 Situations when backward integration may be an effective strategy When present suppliers are expensive. 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. . when the number of suppliers is small and the number of competitors is large. unreliable. When an organization competes in an industry that is growing rapidly.
When present supplies have high profit margin. tempting to invest into the venture. When an organization needs to acquire a needed resource quickly. . as organization can stabilize the cost of its raw materials and associated products through backward integration.Types of Strategies Situations when backward integration may be an effective strategy (contd) When the advantages of stable prices are particularly important.
. Mergers between direct competitors create efficiencies because of potential for eliminating duplicate facilities. acquisitions and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies.Types of Strategies Horizontal Integration A strategy of seeking ownership of or increased control over a firm¶s competitors. Mergers. It is increasingly being used by the firms as growth strategy.
. When increased economies of scale provide major competitive advantage. when competitors are faltering due to lack of managerial expertise or a need for particular resources that an organization possesses.( not if competitors are doing poorly.Types of Strategies Situations when horizontal integration may be an effective strategy When an organization can gain a monopolistic characteristics without being challenged by the law (SECP). when a firm competes in a growing industry. When the firm has the necessary resources of capital and human talent to manage the expanded organization. and overall industry sales are declining.
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. 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. publicity efforts or offering extensive sales promotion items. . advertising expenditure.
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. The usage rate of present customers could be increased significantly. Increased economies of scale provide major competitive advantage. . The correlation between dollar sales and dollar marketing expenditure has been high.
Organization has excess production capacity. Organization¶s basic industry is becoming global. . reliable. 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. inexpensive and good quality channels of distribution are available. Organization has the necessary resources to expand operations. New untapped or unsaturated markets exist.
Types of Strategies Product Development A strategy that seeks increased sales by improving or modifying present products or services. . 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. It normally entails large R & D expenditure.
Types of Strategies Major competitors offer better -quality products at comparable prices. Concentric Diversification Acquiring new. but related. Concentric. . Horizontal and conglomerate. Organization competes in a high-growth industry. 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. products or services. especially when the company is competing in an un attractive industry.
Types of Strategies Situations when Concentric diversification may be an effective strategy When an organization competes in a no-growth/ slowgrowth industry. 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. When an organization has strong management team. When adding new but related products would significantly enhance the sales of current products. . When new related products could be offered at highly competitive prices.
unrelated products or services for present customers. . The new product has countercyclical sales patterns compared to an organization¶s present products. 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. Organization¶s present marketing channels can be used to market new products to current customers. Revenue of the organization would increase significantly. Situation when Horizontal Diversifications may be an effective strategy.
Organization has the opportunity to purchase unrelated business providing an attractive investment opportunity. Organization¶s basic industry is experiencing decline in sales / profits. Situations when conglomerate diversification may be an effective strategy. unrelated products or services. There exists financial synergy between the acquired and acquiring firms. Antitrust action could be charged against an organization that has concentrated on a single industry. Organization has the capital and managerial talent to successfully compete in a new industry.Types of Strategies Conglomerate Diversification Adding new. The existing markets for company¶s present products are saturated. .
reducing the number of employees and controlling expenses.Types of Strategies Defensive Strategies Retrenchment. . Also called a turnaround or reorganization strategy.. closing obsolete factories. Divestiture and Liquidation are defensive strategies. closing marginal businesses. Entails selling off land and buildings to raise needed cash. automating processes. is designed to fortify an organization¶s basic distinctive competence. pruning product lines. allowing a firm to avoid major debt obligations and to void union contracts. Retrenchment An organization regroups through cost and asset reduction to reverse declining sales and profits. Bankruptcy can be an effective type of retrenchment strategy.
An organization has failed to meet it¶s objectives and goals repeatedly overtime. Organization has grown so large so quickly that major internal reorganization is needed. take advantage of internal strengths and overcome internal weaknesses overtime. low profitability. could not capitalize on external opportunities. The organization¶s strategic managers have failed. .Types of Strategies Situations when retrenchment may be an effective strategy. poor employee morale. and pressure from stakeholders to improve performance. The organization is plagued by inefficiency. minimize external threats. The organization is a weaker competitor in the industry.
The strategy is used to raise capital for further strategic acquisition or investments. .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. that require too much capital.
Government antitrust action threatens an organization . may be due to different markets. customers. values or needs.Types of Strategies Situations when Divestiture may be an effective strategy. A division is responsible for an organization¶s overall poor performance. managers. A large amount of cash is required quickly and cannot be obtained from other sources. A division is misfit with the rest of an organization. employees. 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.
in parts. When stockholders of a firm can minimize their losses by selling the organization¶s assets. Situations when liquidation may be an effective strategy to pursue. than liquidation is the only way to orderly get max cash from firm¶s assets.Types of Strategies Liquidation Selling all of a company¶s assets. When only alternative left is bankruptcy. for their tangible worth is called liquidation. Organization has pursued both a retrenchment strategy and divestiture strategy and both have failed. Liquidities is a recognition of defeat and therefore. 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. control procedures and incentive systems. 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. Large firms with greater resources compete on a cost leadership and or differentiation basis while small firms often compete on focus basis. Strategies allow organizations to gain competitive advantage from three different bases.Types of Strategies Michael Porter¶s Generic Strategies. Differentiation and focus.
backward and horizontal integration is to gain cost leadership. of buyers with significant bargaining power. It is an effective strategy in situations where customers are price sensitive. . 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. Pursue cost leadership in conjunction with differentiation.Types of Strategies Cost Leadership Strategy Reason for forward. there is few ways of achieving product differentiation.
lower overheads. intolerance of waste.Types of Strategies Implies high efficiency. technology break through make strategy ineffective. . buyer¶s interest switching to other differentiating features beside price. limited perks. rewards linked with cost containment. Competitors imitation of strategy may result in lowering overall Industry profits.
Follow a strategy after careful study of buyers needs and preferences to determine and incorporation of one or more differentiations features. useful life. spare parts availability. product performance. Special features could be superior service. Will allow a firm to charge high price. engineering design. gas mileage or ease of use. Strategy requires strong coordination between R&D and marketing functions. . gain customer loyalty.Types of Strategies Differentiation Strategy.
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.Types of Strategies Focus Strategies To concentrate on a particular group of customers. Focus Strategies are most effective when. geographic market. . ± Rival firms are not attempting to specialize in the same target market. Market Penetration and Market Development strategies offer substantial focusing advantages.
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. Risks of pursuing Focus Strategies. The possibility of many competitors recognizing the successful focus strategy and copying it.
Other types of cooperative arrangements could be. . ± 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. ± Cross-distribution agreements. ± Cross-licensing agreements. The sponsoring firms normally form a separate organization with shared ownership.
. and ± Joint-bidding consortia. Common Problems Leading To Failure Of Joint Ventures 1.Managers who must collaborate daily in operating the venture are not involved in forming or shaping the venture.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.Types of Strategies ± Cross-manufacturing agreements. if supported unequally. 3. problems arise.
or vice versa. Acquisition. Takeover/Hostile Takeover . .When a merger or acquisition is not desired by both parties. Friendly Merger .If the acquisition is desired by both firms.when a large organization purchases (acquires) a smaller firm.Types of Strategies Merger / Acquisition Merger ± When two organizations of about equal size unite to form one enterprise.
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.
. distributors. To gain new technology. To reduce tax obligations. To make better use of the existing sales force. products and creditors. To gain access to new suppliers.Types of Strategies Reasons for Mergers and Acquisitions To provide improved capacity utilization. To gain economies of scale To smooth out seasonal trends in sales. customers. To reduce managerial staff.
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. Within the external environment are the forces of the general environment or macro environment and the forces of the task environment or industry environment .Strategic Management Process The Organizational Environment All forces with potential to influence the organization and its performance is known as organizational environment.
THE ENVIRONMENT The macro-environment Industry Operating Envrnmt Internal Environment The organization Task Environment .
Scan Internal environment to ascertain strengths and weaknesses Monitor. Thus. 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. It is a tool used by corporations to avoid strategic surprise and to ensure long-term health .
finance etc. avoid weak or faltering industries. and gain a full understanding of key external factors relationships within that industry. IO perspective requires the firms to compete in attractive industries. Competitive advantage is determined largely by competitive positioning within and industry. 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.Strategic Management Process The Industrial Organization (IO) View According to IO approach. the external (industry) factors are more important than internal factors in a firm achieving competitive advantage. .
and level of competitiveness than on internal resources. product differentiation. structures. However. barriers to market entry.Strategic Management Process Firm performance is primarily based more on industry properties. capabilities. such as economies of scale. and operations. . Research findings suggest that approximately 20 percent of a firm¶s profitability can be explained by the industry. whereas 36 percent of the profitability is attributed to the firm¶s internal factors.
Technological forces. governmental and legal forces. Competitive forces. Distributors. Managers. Social. . Special interest groups. Services. Governments. Trade Associations. demographic and environmental forces. Communities. Political.Strategic Management Process Key External Forces: ± ± ± ± ± Economic forces. Products. Labor Unions. Stockholders. Creditors. Customers. cultural. Organization¶s Operating Environment: Competitors. Suppliers. Markets and Natural Environment. Employees.
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. . Changes in external forces is reflected into: ± Changes in consumer demand for both industrial and consumer products and services. ± The nature of positioning and market segmentation strategies.
to identify key external factors which are. ± Measurable. List of key external factors be communicated to all in the organization. number of managers and employees. ± Important for achieving long-term and annual objectives. human resources and internet. . ± Hierarchical effecting overall company and functional/ divisional areas. Gather competitive intelligence about key external force¶s trends by using print/electronic media.Strategic Management Process Get the participation of max. ± Applicable to all competing firms. Evaluate and assimilate the info.
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. 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. ± ± ± ± ± ± ± General availability of credit. etc. The firm must consider. . OPEC. NAFTA.Strategic Management Process Economic Forces The Nature and direction of economy in which firm operates. The level of disposable income. stock prices.
cultural. markets and customers and all sorts of organizations. demographic and environmental factors have impact on virtually all products. Changes in social.Strategic Management Process Social. services. Cultural. and all industries are challenged by the opportunities and threats arising from these changes. Demographic and Environmental forces. .
rules for laying off employees . (Golden hand shake) under Govt. Companies have to pay heavy penalty in shape of expensive severance packages. governmental and legal factors can represent key opportunities or threats for both small and large organizations. Governmental and Legal Forces Federal.Strategic Management Process Political. employers and customers of organizations. subsidizers. state. Political. local and foreign governments are major regulators.
companies relying only on domestic market may find it difficult to survive. . import duty on raw materials. subsidies.Strategic Management Process Political forecast is vital part of external audit for industries/ firms depending on Govt. Political forecasts is critical for multinational firms that depend on foreign countries for natural resources. Mass communication and high technology is creating similar patterns of consumption in diverse cultures world wide. contracts. Changes in tax rates. special tariffs can affect firms significantly. or markets for their products. facilities.
. increasing speed of distribution . altering economies of scale and changing entry barriers. New positions of CIO and CTO are being introduced in companies to effectively capitalize on e-commerce. Internet is saving companies billions of dollars in distribution and transaction from direct sales.Strategic Management Process Technological Forces Technological advances have brought revolution in business operations. erasing limitations of traditional geographical markets. It is changing the nature of opportunities and threats by altering the life cycle of products.
distributors. suppliers.Strategic Management Process Technological forces represent major opportunities and threats which should be taken care of while formulating strategies. customers. ± Create new more powerful competitive advantage. ± Change the relative cost position in an industry. markets. managers and customers. . ± Render existing products and services obsolete. services. ± Change values and expectations of employees. ± Create shorter production runs. ± Products. manufacturing processes. ± Create shortage in technical skills. marketing practices and competitive position. Technological breakthroughs can dramatically affect. operations.
opportunities. ± Market share.Strategic Management Process Competitive Forces It is imperative in external audit to identify rival firms and determine their strengths. ± Understanding and remembering precisely what is your business. ± Bringing improvement. Nothing quite recedes like success. tired of hearing it? Too bad. not just in product but the whole company. . objectives and strategies. threats. Characteristics of a competitive firm. ± Innovate or evaporate. ± Acquisition is essential to growth. The most-successful purchases are in niches that add technology or a related market. weaknesses. ± People make a difference. capabilities. ± There is no substitute for quality and no greater threat than failing to be cost-effective on a global basis.
Benefits of corporate spying include increased revenues. Competitive intelligence is equally applicable for strategy formulation. 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.Strategic Management Process Competitive Intelligence (CI) A systematic and ethical process for gathering and analyzing info about competitors activities and general business trends to further a business¶ own goals. . lower costs and better decision making.
distributors. customers. creditors.Strategic Management Process Objectives of Competitive Intelligence (CI) To provide general understanding of an industry and its competitors. managers. . employees. Cooperation Among Competitors Unethical tactics like bribery. Identify competitors potential moves that might endanger a firm¶s position in the market. wiretapping. Identify areas in which competitors are vulnerable and assess the impact strategic actions would have on competitors. newspaper articles. online interviews with celebrities and government filings. Sources of CI Internet. suppliers. and computer break-ins should not be used in CI. want ads. trade journals.
± ± ± ± ± Rivalry among competing firms. According to Model. Potential entry of new competitors. .Strategic Management Process Industry Environment Competitive Analysis: Porter¶s Five-Forces Model. A widely used approach for developing strategies in many industries. Bargaining power of suppliers. 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 .
± By becoming more equal in size and capability. adding features. . ± with the increase in number of competitors. Change in strategy by one firm may be met with retaliating countermoves like lowering of prices. enhancing quality. extending warranties or increasing advertising. The intensity of rivalry increases.Strategic Management Process Rivalry among Competing firms The most powerful of five Competitive forces. providing services. A successful strategy giving competitive advantage to a firm can be pursued by rival firms.
± When mergers and acquisitions are common in the industry. ± The industry becomes Inherently unattractive. As rivalry among competing firms intensifies. ± Industry¶s profits decline. _ Consumers can switch brands easily.Strategic Management Process -With decrease in demand of industry¶s products. ± When fixed costs are high. ± when product is perishable. . ± Barriers to leaving the market are high.
regulatory policies. counterattack by entrenched firms or potential saturation of the market: . strong brand preference. Govt. undesirable locations. large capital requirement. sophisticated technology and know how. Barriers to entry include.Strategic Management Process Potential Entry of New Competitors Easy entry of a firm in an industry. possession of patents. strong customer loyalty. lack of access to raw materials. Economy of scale. increases the intensity of competitiveness among the firms.
.Strategic Management Process New firms enter the industry with. Strategist must identify new entrants. ± lower prices. their strategies. ± Substantial market resources. ± High quality products. plan counter attack if required and capitalize on existing strengths and weaknesses.
paperboard. like plastic container producer competing with glass. Competitive strength of the substitute product could be measured by its market share. Presence of substitute put ceiling on the price of a product. competitive pressure arise when price of the substitute product decreases or consumer¶s switching cost decreases.Strategic Management Process Potential Development of Substitute Products Firms are in close competition with producers of substitute products. or aluminum can producer. . Or the firms plane for increased capacity and market penetration.
± There are only few substitute raw materials. Firms may pursue a backward integration strategy to gain control or ownership of suppliers.Strategic Management Process Bargaining Power of Suppliers It affects the intensity of competition in industry when. ± When cost of switching raw materials is high. . too costly or not capable of meeting a firm¶s demand on consistant bases. ± There is large number of suppliers. This strategy is effective when suppliers are unreliable.
and accessory packages.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. Consumers can negotiate selling price. warranty coverage. ± Products being purchased are standard or undifferentiated. Rival firms offer extended warranties or special services to gain consumer loyalty. ± Buy in volume.
and competitive information. The Matrix can be developed in five steps. governmental. by writing opportunities first and than threats. technological.Strategic Management Process The External Factor Evaluation (EFE) Matrix The matrix allows the strategists to summarize and evaluate economic. legal. . environmental. cultural. social. ± i) List external factors identified in external audit (about 10 to 20 factors) including both opportunities and threats. political. demographic.
Appropriate weight can be determined by comparing successful with unsuccessful competitors or by discussing the factor and reaching a group consensus. where.0. The weight indicates the relative importance of that factor in success of the firm¶s industry.Strategic Management Process ± ii) Assign each factor a weight ranging from 0.0 (very important). 4 = the response is superior. 2 = the response is average. The total of all weight assigned to the factors must be equal 1. . 3 = the response is above average. and 1 = the response is poor.0 (not important) to 1. ± 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.
± v) Sum the weighted score for each variable to determine the total weighted score for the organization. . The average total weighted score is 2.0. whereas the weights in step 2 are industry based.0 and the lowest 1.Strategic Management Process Ratings are based on effectiveness of the firm¶s strategies thus company-based.5. The highest possible total weighted score for an organization is 4. The score of 4.0 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. or taking advantage of opportunities and minimizing effects of threats.
20 .15 .15 .05 .60 .15 .05 .05 .05 .15 .V Increasing free cash flow Owns one mile on beach Strong management team Buffet at most facilities Long-range planning Reputation as family friendly Financial ratios Weight Rating Weighted Score .05 .Strategic Management Process A SAMPLE INTERNAL FACTOR EVALUATON MARTRIX Key Internal Factors Internal Strength Largest Casino in country Room Occupancy 95% in L.05 4 4 3 4 3 3 4 3 3 .10 .40 .20 .15 .05 .15 .
10 .05 .Strategic Management Process Key Internal Factors Internal Weaknesses Most properties located in L. not high Recent loss of joint venture Total Weight Rating Weighted Score .00 1 2 2 1 .10 .05 .05 .75 .10 2.05 .10 1.V Little diversification Family reputation.
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. 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 . where. therefore the ratings refer to strengths and weaknesses. The weights and total weighted scores in both a CPM and EFE have the same meaning.
financial position customer loyalty. product quality. breadth of product line. . Other than critical success factors. could be. effectiveness of sales distribution. union relations. technological advantages and e-commerce expertise. production capacity and efficiency. experience. location of facilities. global expansion and market share. price competitiveness. proprietary or patent advantages.Strategic Management Process For example critical success factors for firms may include advertising. management.
± Strategy be consistent with conditions in competitive environment. Three critical ingredients of a successful strategy. ± Strategy to place realistic requirements on the firm¶s resources. Involvement of representatives of managers and employees from throughout the firm to determine firm¶s internal strengths and weaknesses . ± Strategy be carefully executed.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. provide the basis for establishing objectives and strategies.
which can be grouped into three categories. Three Basic Resources Physical resources. human resources. . Physical Resources Plant and equipment. technology. location. and organizational resources. internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage. The organizational performance will primarily be determined by internal resources.Strategic Management Process The Resource-Based View (RBV) According to RBV approach. raw materials and machines.
patents. knowledge. type. planning processes. . skills. databases. training. information systems. accumulated experience within organization and so on. and abilities Organizational Resources Firm structure. amount. and nature of a firm¶s internal resources first in devising strategies that can lead to sustainable competitive advantage. The firm must consider the mix. trademarks. copyrights. RBV theory asserts that sources are actually what helps a firm exploit opportunities and neutralize threat.Strategic Management Process Human Resources All employees. intelligence. experience.
and processes that a company uses to transform inputs into outputs. 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. abilities and ways of combining assets. . They enable the firm to take the same input factors as rivals and convert them into products and services. people. becomes the basis for lasting competitive advantage. nurtured and deployed throughout the firm. 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. ± Commodities. ± Cash. Easy to imitate. competitors will match or better any resource sooner than later. .
± Reputation for fairness. ± Patents.Strategic Management Process Can be imitated (but may not be). ± Employee Satisfaction. . ± capacity ± Economy of scale Difficult to Imitate ± Brand loyalty. ± 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. .Based View in Internal Analysis.Strategic Management Process Durability: How rapidly will the resource depreciate? Substitutability: Are other alternatives available? Using Resource.
Strategic Management Process Methods to identify resources with strategic value. Disaggregate resources: Break them into more specific competencies rather than stay with broad categorizations. Utilize a functional perspective. 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. activities and processes having potential competitive advantage. Use value chain approach to identify capabilities. .
± Bar positioning.Strategic Management Process Disaggregating a Restaurant¶s Customer Service Resource. ± External Signs/ welcome Offering a delightful ambiance ± Floor design. floor materials. ± Features/décor. color scheme. ± Door Positioning and style. Providing ease of access ± Parking (where appropriate). Theme. window decorations ± Table layout Table materials .
± Visible queuing system.Strategic Management Process Providing a Special welcome ± Host greeting ± Welcome drinks/ eats ± Menu introduction ± Table decoration Ensuing waiting time at the table is´ as expected´ and as enjoyable as possible. . ± Marketing literature. ± Entertainment for queuers.
Job experience Motivation awards. 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. Daily Meetings. coaching process Discipline system.
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. .
language. legends. rituals. Cultural products or dimensions include values. stories. thing. symbols. beliefs. myths. heroes. rites. saga. and that has worked well enough to be considered valid and to be taught to new members as the correct way to perceive. ceremonies. . and heroines.Strategic Management Process Organizational Culture A pattern of behavior (that has been) developed by an organization as it learns to cope with its problem of external adaptation and internal integration. and feel. This definition emphasizes the importance of matching external with internal factors in making strategic choices. metaphors.
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. aggressive. friendly. The strategic management process takes place largely within a particular organization culture. or likable. and evaluation activities. liberal. harsh. innovative. implementation.Strategic Management Process These dimensions are levers that strategists can use to influence and direct strategy formulation. open. conservative. It must foster competence and enthusiasm among managers and employees .
The challenge of strategic management is to bring about the changes in organizational culture and individual mindsets that are needed to support the formulation. If the firm¶s culture is not supportive. . If strategies can capitalize on cultural strengths. and evaluation of strategies. implementation. However. then management can implement changes swiftly. like strong work ethic or highly ethical beliefs. strategic changes may be ineffective or even counterproductive.Strategic Management Process Organizational culture significantly affects business decisions and thus must be evaluated during an internal strategic management audit.
Also. dramatic. an unquestioned belief about the practical benefits of certain techniques and behaviors that is not supported by facts. Ceremonial ± A system of several rites connected with a single occasion or event. detail set of techniques and behaviors that manage anxieties. planned sets of activities that consolidate various forms of cultural expressions into one event. . technical consequences of practical importance. Ritual ± A standardized. usually for the benefit of an audience.Relatively elaborate. usually used to explain origins or transformation of something. carried out through social interactions.Strategic Management Process Cultural Products or Dimensions Rites . Myth ± A dramatic narrative of imagined events. but seldom produce intended.
Language ± A particular form or manner in which members of a group use sounds and written signs to convey meanings to each other. Story ± A narrative based on true events. Symbol ± Any object. usually by representing another thing. Legend ± A handed down narrative of some wonderful event that is based on history but has been blown up with fictional details. or relation that serves as a vehicle for conveying meaning. Folktale ± A completely fictional narrative.Strategic Management Process Saga ± A historical narrative describing the unique accomplishments of a group and its leaders. event. sometimes a combination of truth and fiction. usually in heroic terms. . act.
Strategic Management Process Metaphors ± Shorthand words used to capture a vision or to reinforce old or new values. . Values .life-directing attitudes that serve as behavioral guidelines. Belief ± An understanding of a particular phenomenon. Heroes/Heroines ± Individuals whom the organization has legitimized to model behavior for others.
and controlling. Planning enables a firm to gather the resources needed and carry out tasks in the most efficient way.Strategic Management Process Management The function of management are five basic activities. Planning enables a firm to take into account relevant factors and focus on the critical ones. staffing. Planning The only thing certain about the future of any organization is change. motivating. . and planning is the essential bridge between the present and the future that increases the likelihood of achieving the desired results. organizing. planning. Planning is an up-front investment in success.
why. Strategic management can be viewed as a formal planning process that allows an organization to pursue proactive rather than reactive strategies. when.Strategic Management Process Planning enables a firm to identify precisely what is to be achieved and to detail precisely the who. where. what. . Planning helps ensure that the firm can be prepared for all reasonable eventualities and for all changes that will be needed. Successful organizations strive to control their own futures rather than merely react to external forces and events as they occur. and how needed to achieve desired objectives.
± Breaking tasks down into jobs ( work specialization ). ± Combining jobs to form departments ( departmentalization). Resources are allocated more effectively and used more efficiently in a well organized firm than in a disorganized firm. Organizing means determining who does what and who reports to whom. .Strategic Management Process Organizing The purpose of organizing is to achieve coordinated efforts by defining tasks and authority relationship. The organization function consist of three sequential activities. and ± Delegation authority.
span of control. which lead to specialization and according to Adam Smith (Wealth of Nations published 1776) would lead to higher productivity. Changes in strategy often require changes in structure because positions may be created. 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. deleted. or merged. . and matrix. Combining jobs to form departments results in an organizational structure. divisional. and chain of command. business unit.
They expect to be delegated authority and responsibility. 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. .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´.
Strategic Management Process Strategic Objectives Strategic objectives or long-term objectives represent the results expected from pursuing certain strategies. Profitability. hierarchical. realistic. measurable. understandable. Earning per share and Social responsibilities. Objectives should be quantitative. ± ± ± ± ± ± ± Growth in assets. Objectives are commonly stated in terms of. Market share. . and obtainable. Growth in sales. challenging. Degree and nature of diversification.
Strategic Management Process Clearly stated objectives help stakeholders understand their role in an organization. They provide basis for consistent decision making by managers whose values and attitudes differ. an organization can minimize potential conflicts later during implementation . By making objectives through consensus.
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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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Internal Environment Analysis Business Ethics and Social Responsibility Ethics A system of behaviors. 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. . Unethical Behavior Conduct that is considered µwrong¶ or µbad¶ in the context of a moral code. It conforms not only to the law.
Ethical Standard A guidelines governing moral conduct of a particular group. . ethical principles.Code Of Ethics A formal statement of the organization¶s values. and ethical rules.
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