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 . ± 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.may lead to regulation on consumers in future. friends neighbors etc.

e-Trade.Evolution of Strategic Management Internet has changed the economics of business in every single industry worldwide. e-mail and e-toys have become integral part of everyday life worldwide. the Internet will change society more than telephone and television combined. ± Business to Business e-commerce is five time greater than consumer e-commerce. ± According to seventy four percent Americans in a survey. e-commerce. . ± Slogans and company¶s like e-Bay.

research and development. . ‡ It focuses on integrating management. finance/ accounting. production /operations. marketing.Strategic Management Definition The art and science of formulating implementing and evaluating cross-functional decisions that enable an organization to achieve it¶s objectives. and computer information systems to achieve organizational objectives. ‡ The purpose of strategic management is to exploit and create new and different opportunities for tomorrow.

. systematic approach for making major decisions in an organization. It attempts to organize qualitative and quantitative information in a way that allows effective decision making under uncertainty.Strategic Management Process Strategic Management Process It is an objective. establishing long term objectives. identifying an organization¶s external opportunities and threats. logical. Strategy Formulation Developing a vision and mission. ± Strategy implementation. ± Strategy evaluation. ± Strategy formulation. generating alternative strategies and choosing particular strategy to pursue. determining internal strengths and weaknesses. Three stages of Strategic Management Process.

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. . ³ Our vision is to take care of your vision´ A vision statement of Atlanta Web Printers. The first choice is the best choice.

. A clear mission statement is essential for effectively establishing objectives and formulating strategies. .Strategic Management Process Mission Statement An enduring statement of purpose that distinguishes one organization from other similar is a declaration of an organization¶s ³ reason for being ³answering the pivotal question ³ what is our business´.

for allocating organizational resources. Facilitate the translation of objectives in to work structure involving the assignment of tasks to responsible elements in organization. ‡ Specify organization¶s purpose and then translate these into objectives in such a way that cost. Provide a basis. or standard.Strategic Management Process Importance of Vision and Mission Statements ‡ ‡ ‡ ‡ Ensure unanimity of purpose within the organization. . time and performance parameters can be assessed and controlled. Establish a general tone or organizational climate.

governmental. demographic. legal.Strategic Management Process External Opportunities and Threats The trends and events that could significantly benefit or harm an organization in the future are referred to external opportunities and threats like economic. . political. technological or competitive trends. They are largely beyond the control of a single organization-thus the word external. Firms to formulate strategies to take advantage of external opportunities and to avoid/reduce the impact of external threats. social. environmental. cultural.

‡ Organizations strive to pursue strategies that capitalize on Internal strengths and eliminate internal weaknesses.Strategic Management Process Internal Strengths and weaknesses An organization¶s controllable activities that are performed especially well or poorly. ‡ They arise in the management. finance/accounting. production/ operations. . marketing. research and development and management information system activities of a business.

advertising effectiveness and customer loyalty. ‡ Internal factors can be determined by computing ratios. measuring performance and comparing to past periods and industry averages.Strategic Management Process ‡ Strengths and weaknesses are determined relative to competitors. ‡ Strengths and weaknesses can be determined by elements of being rather than performance. . production efficiency. ‡ Survey method could be used to determine employee morale. ‡ Strengths and weaknesses can be determined relative to a firm¶s own objectives.

organizing. create synergy. aid in evaluation. reasonable and clear. Objectives should be challenging.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. reveal priorities. focus coordination and provide a basis for effective planning. motivating and controlling activities. . Objectives state direction. consistent. measurable.

market penetration. .Strategic Management Process Strategy It is the means by which long-term objectives can be achieved. Business strategies may include geographic expansion.oriented having multifunctional or multidivisional consequences for the organization. product development. liquidation and joint venture. diversification. Strategies are potential actions thus future. acquisition. retrenchment.

Whether to enter international market.Strategic Management Process Strategy formulation issues ‡ ‡ ‡ ‡ ‡ ‡ ‡ Deciding what new business to enter What businesses to close. Whether to expand operations or diversify. . Whether to merge or form a joint venture How to avoid a hostile takeover. How to allocate resources.

motivate employees. Developing a strategy-supporting culture Creating an effective organizational structure. Strategy Implementation includes. Preparing budget. It entails establishment of annual objectives. devise policies. and Linking employee compensation to organizational performance .Strategic Management Process Strategy Implementation It is also called ³the action stage of strategic management´. and allocate resources so that formulated strategies can be executed. Redirecting marketing efforts. Developing and utilizing information systems.

requires good intuitive and analytical skills Strategy implementation .requires special motivation and leadership skills .focuses on effectiveness Strategy implementation . 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 .

varies substantially among different types and sizes of organizations .requires coordination among a few individuals Strategy implementation .concepts and tools similar for small.Strategic Management Process Strategy formulation . for profit or nonprofit organizations Strategy implementation .requires coordination among many individuals Strategy formulation . large.

Strategy evaluation is necessary because success today is no guarantee of success tomorrow . ± Measuring performance. All strategies are subject to future modifications because of persistent changes in the external and internal environment of an organization.Strategic Management Process Strategy Evaluation It is the means for management to determine whether the strategy is working or otherwise. ± Review external and internal environment factors which are bases for current strategies. Three fundamental strategy evaluation activities are. ± Taking corrective actions.

± 1. ± 3. Establish and provide the sources necessary to complete each step. 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. managers. ± 4. To develop a program. The plan becomes obsolete when its one-time goals have been achieved. Determine the logical sequence of steps. ± 2.Strategic Planning Types of Plans Single use plan A plan designed to fit one-time situation. Two common types of single-use plans are programs and projects. Divide the course of action into steps.

Policy ± a standing plan that provides broad guidelines for directing managerial activities in pursuit of organizational goals . and rules. Gauge the time needed to finish each step. procedures.Strategic Planning -5. 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. for example. Project A single-use plan that is narrower in scope than a program and aimed at achieving a specific one-time goal. . Prepare a schedule for implementation. Bhasha Dam project in the national program of provision of electricity to the whole country. Three commonly used types of standing plans are policies. and ± 6.

± Rule ± a standing plan specifying the circumstances in which certain activities can or cannot be performed. . Contingency Plans Alternative courses of actions to be followed if unforeseen environmental shifts occur.Strategic Planning ± Procedure ± a standing plan encompassing a series of detailed steps to be followed in particular recurring situation.

3 years Operational Plans .Strategic Planning Levels of Planning Strategic Tactical Operational General Time Period Considered for Plans Strategic Plans .1 year .5 years Tactical Plans .

The Managerial Pyramid Mission Strategic Goals/ Plans (organization as a whole) Tactical Goals/ Plans (major divisions. functions) Operational Goals/ Plans (departments and units) .

Strategic Planning
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.

Strategic Planning
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

Strategic Planning
1.Resources 2.Methods 3.Tasks 4.Sequence 5.Individuals 6.Location 7.Deadlines 8.Stop points 9.Measurement

These firms generally exhibit superior long-term financial performance relative to their industry. High performing firms do systematic planning to prepare for future fluctuations in their external and internal environment. profitability and productivity.Strategic Planning Benefits of Strategic Planning Financial Benefits Organizations using strategic management concepts are more profitable and successful than those who do not. Businesses show significant improvement in sales. .

Increased employee productivity. Strategic management enhances the problem-prevention capabilities of organizations because it promotes interaction among managers at all divisional and functional levels. . Enhanced awareness of external threats An improved understanding of competitors¶ strategies. Clear understanding of performance-reward relationships. Reduced resistance to change.Strategic Planning Nonfinancial Benefits Strategic management offers.

and provides a unifying framework. . Helps integrate the behavior of individuals into a total effort. Encourages forward thinking. prioritization and exploitation of opportunities. Allows more effective allocation of time and resources to identified opportunities.Strategic Planning Benefits of Strategic Planning Allows for identification. Directs decision making to support established objectives. Creates a framework for internal communication among personnel. Provides a basis for clarifying individual responsibilities. avoiding piecemeal decision making. Presents a framework for improved coordination and control of activities. Facilitates managerial control through setting of standards for monitoring and measuring performance.

. ( time spent on planning is investment).Strategic Planning Reasons For No Strategic Planning By Firms Poor reward structure ± often fail to reward success but ready to punish for failure. Fire-fighting ± busy in crisis management and not finding time to plan. Too Expensive ± culturally opposed to spending resources. Waste of time ± see planning as waste of time since no marketable product is produced. Laziness ± may not want to put effort needed for planning. Content with success ± they think no need to plan because things are fine as they stand.

can also be done badly. However. like anything else. Honest difference of opinion ± sincerely believe the plan is wrong as they are watching the situation from different viewpoing. or privilege through effectively using old system. impractical. of aptitude with new system or of their ability to take on new roles. Fear of Unknown ± uncertain of abilities to learn new skills. or inflexible. . they may rely less on formal planning.Strategic Planning Fear of failure ± not doing anything. However whenever something worthwhile is attempted. there is some risk of failure. he/she sees anew plan as threat. Planning. no risk of failure. being overconfident or overestimating experience can bring failure Prior bad experience ± plans have been long. Overconfidence ± as individuals amass experience. Self-interest ± when some one has achieved status. cumbersome.

Types of Strategies Integration Strategies Intensive Strategies Diversification Strategies Defensive Strategies Michael Porter¶s Generic Strategies Strategy is choosing among the alternatives. Strategic planning involves ³choices that risk resources´ and ³tradeoffs that sacrifice opportunity´. According to Hansen and Smith. . you cant follow a combination strategy for too long.

± 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. retail outlets .costs and opportunities are spread across many individuals. ± Establishing websites to sell products directly to consumers. ± Franchising ..

. organizations can increase the predictability of the demand through forward integration. When the industry is growing and expected to continue growing. Organizations present distributors are expensive. When profit margins for distributors or retailers are high. firms having forward integration are availing competitive advantage. unreliable or incapable of meeting the firms distribution needs. Availability of quality distributors is limited.Types of Strategies Situations when forward integration may be an effective strategy. however. Advantages of stable productions are high. When organization has both the capital and human resources. forward integration reduces organization¶s ability to diversify if it¶s basic industry falters.

Global competition is prompting firm¶s to reduce number of suppliers and to demand higher level of service and quality from selected ones. . too costly or cannot meet firm¶s requirements Firms having global sources of supply opt for deintegration.Types of Strategies Backward Integration A strategy of seeking ownership or increased control of a firm¶s suppliers particularly in situations when firm¶s suppliers are unreliable. Firms increasingly use websites on backward integration opportunities.

When an organization has both capital and human resources to manage the new business of supplying its own raw material.Types of Strategies Situations when backward integration may be an effective strategy When present suppliers are expensive. . unreliable. When an organization competes in an industry that is growing rapidly. when the number of suppliers is small and the number of competitors is large. or incapable of meeting the firms needs.

tempting to invest into the venture. When present supplies have high profit margin. 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.

acquisitions and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies. It is increasingly being used by the firms as growth strategy. Mergers between direct competitors create efficiencies because of potential for eliminating duplicate facilities. Mergers.Types of Strategies Horizontal Integration A strategy of seeking ownership of or increased control over a firm¶s competitors. .

.( not if competitors are doing poorly. 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 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). and overall industry sales are declining. when a firm competes in a growing industry.

advertising expenditure.Types of Strategies Intensive Strategies Requires intensive effort from the firm to improve it¶s competitive position with existing products. Market 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. Market penetrations includes increasing number of salespersons. . publicity efforts or offering extensive sales promotion items.

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.Types of Strategies Situations when market penetration may be an effective strategy Current markets are not saturated with a particular product or service. . Increased economies of scale provide major competitive advantage. The correlation between dollar sales and dollar marketing expenditure has been high.

reliable. Situations when market development may be an effective strategy New. Organization is very successful at what it does. Organization has excess production capacity. New untapped or unsaturated markets exist. Organization¶s basic industry is becoming global. Organization has the necessary resources to expand operations. .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 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 Product Development A strategy that seeks increased sales by improving or modifying present products or services.

Concentric Diversification Acquiring new. Organization competes in a high-growth industry. Concentric. but related. Horizontal and conglomerate. . There are three types of diversification strategies.Types of Strategies Major competitors offer better -quality products at comparable prices. especially when the company is competing in an un attractive industry. products or services. Organization has strong research and development capabilities Diversification Strategies Diversification strategy is followed to avoid dependence on any single industry.

When new related products could be offered at highly competitive prices. When the company¶s products are in the declining stage of the product¶s life cycle. . When adding new but related products would significantly enhance the sales of current products. When an organization has strong management team.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.

Types of Strategies Horizontal Diversification Adding new. . 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. unrelated products or services for present customers. Situation when Horizontal Diversifications may be an effective strategy. The new product has countercyclical sales patterns compared to an organization¶s present products. Revenue of the organization would increase significantly.

The existing markets for company¶s present products are saturated. Situations when conglomerate diversification may be an effective strategy. . Organization has the opportunity to purchase unrelated business providing an attractive investment opportunity. Organization¶s basic industry is experiencing decline in sales / profits. Antitrust action could be charged against an organization that has concentrated on a single industry. There exists financial synergy between the acquired and acquiring firms.Types of Strategies Conglomerate Diversification Adding new. unrelated products or services. Organization has the capital and managerial talent to successfully compete in a new industry.

Bankruptcy can be an effective type of retrenchment strategy. closing marginal businesses.Types of Strategies Defensive Strategies Retrenchment. Also called a turnaround or reorganization strategy. pruning product lines. reducing the number of employees and controlling expenses. . allowing a firm to avoid major debt obligations and to void union contracts. is designed to fortify an organization¶s basic distinctive competence.. automating processes. Retrenchment An organization regroups through cost and asset reduction to reverse declining sales and profits. closing obsolete factories. Divestiture and Liquidation are defensive strategies. Entails selling off land and buildings to raise needed cash.

. minimize external threats. poor employee morale. The organization is a weaker competitor in the industry.Types of Strategies Situations when retrenchment may be an effective strategy. take advantage of internal strengths and overcome internal weaknesses overtime. could not capitalize on external opportunities. The organization¶s strategic managers have failed. Organization has grown so large so quickly that major internal reorganization is needed. and pressure from stakeholders to improve performance. An organization has failed to meet it¶s objectives and goals repeatedly overtime. low profitability. The organization is plagued by inefficiency.

that require too much capital. Divestiture can be apart of an overall retrenchment strategy to rid an organization of businesses that are unprofitable.Types of Strategies Divestiture Selling a division or part of an organization. The strategy is used to raise capital for further strategic acquisition or investments. or that do not fit well with the firm¶s other activities. .

employees. values or needs. customers. managers. Government antitrust action threatens an organization . A division is misfit with the rest of an organization. A division needs more resources to be competitive than the company can provide. A large amount of cash is required quickly and cannot be obtained from other sources. A division is responsible for an organization¶s overall poor performance.Types of Strategies Situations when Divestiture may be an effective strategy. The organization has pursued a retrenchment strategy but failed to accomplish needed improvements. may be due to different markets.

It is better to cease operating than to continue loosing large sums of money. in parts. . Liquidities is a recognition of defeat and therefore. Organization has pursued both a retrenchment strategy and divestiture strategy and both have failed. When stockholders of a firm can minimize their losses by selling the organization¶s assets. When only alternative left is bankruptcy. can be an emotionally difficult strategy.Types of Strategies Liquidation Selling all of a company¶s assets. for their tangible worth is called liquidation. than liquidation is the only way to orderly get max cash from firm¶s assets. Situations when liquidation may be an effective strategy to pursue.

cost leadership. . Differentiation and focus. Cost leadership emphasis on producing standardized products at a very low per unit cost for price sensitive consumers. 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. Strategies allow organizations to gain competitive advantage from three different bases. control procedures and incentive systems. 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.

Pursue cost leadership in conjunction with 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. 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. buyer are not bothered about brands and there are large no. there is few ways of achieving product differentiation.

technology break through make strategy ineffective. Competitors imitation of strategy may result in lowering overall Industry profits. buyer¶s interest switching to other differentiating features beside price. limited perks. intolerance of waste. . lower overheads. rewards linked with cost containment.Types of Strategies Implies high efficiency.

gain customer loyalty. 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. . Special features could be superior service. Will allow a firm to charge high price. engineering design. Strategy requires strong coordination between R&D and marketing functions. spare parts availability.Types of Strategies Differentiation Strategy. useful life. product performance.

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.Types of Strategies Focus Strategies To concentrate on a particular group of customers. Focus Strategies are most effective when. ± Rival firms are not attempting to specialize in the same target market. ± Consumers have distinctive preferences or requirements. . Market Penetration and Market Development strategies offer substantial focusing advantages. geographic market.

. The possibility of many competitors recognizing the successful focus strategy and copying it.Types of Strategies Medium to large firms can pursue focus strategies only in conjunction with differentiation or cost leadership-based strategies. Risks of pursuing Focus Strategies. The consumer preferences drifting towards the product attributes desired by the market as a whole.

± 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. . Other types of cooperative arrangements could be. The sponsoring firms normally form a separate organization with shared ownership.

problems arise.The venture may begin to compete more with one of the partners than the other.Types of Strategies ± Cross-manufacturing agreements.Managers who must collaborate daily in operating the venture are not involved in forming or shaping the venture. and ± Joint-bidding consortia. 2. 3. . The venture may not be supported equally by both partners. if supported unequally. Common Problems Leading To Failure Of Joint Ventures 1.

or vice versa. Friendly Merger .If the acquisition is desired by both firms. Takeover/Hostile Takeover . .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. Acquisition.when a large organization purchases (acquires) a smaller firm.

Not all mergers are effective and successful ± about half produced negative returns to shareholders (Wall Street Journal studies) .Types of Strategies Forces driving Mergers/ Acquisitions Technological Change Excess capacity Inability to boost profits through price increases A depressed stock market Need to gain economies of scale Bargains galore as companies struggle and while stock prices are low.

To gain access to new suppliers. products and creditors.Types of Strategies Reasons for Mergers and Acquisitions To provide improved capacity utilization. To make better use of the existing sales force. To reduce managerial staff. To gain economies of scale To smooth out seasonal trends in sales. To gain new technology. distributors. To reduce tax obligations. . customers.

Types of Strategies
First Mover Advantages The benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firm is known as first mover advantages. It may include;
± Securing access to rare resources. ± Gaining new knowledge of key factors of issues, and ± Carving out market share and a position that is easy to defend and costly for rival firms to overtake.

Risk associated being first mover ± unexpected and unanticipated problems and costs may occur being the first firm doing business in the new market.

Types of Strategies
According to research, first mover advantages tend to be greatest when competitors are roughly the same size and possess similar resources. Otherwise, larger competitors can wait while others make initial investments and mistakes, and then respond with greater effectiveness and resources Out Sourcing Business Process Outsourcing (BPO) involves companies taking over the functional operations, such as human resource, information systems, payroll, accounting, customer service, and even marketing of other firms.

Types of Strategies
Companies choose to outsource because; It is less expensive, It allows the firms to focus on its core business, and It enables the firm to provide better service. BPO is the means for achieving strategies that are similar to partnering and joint venture.

The organizational environment consists of the internal environment and the external environment.Strategic Management Process The Organizational Environment All forces with potential to influence the organization and its performance is known as organizational environment. Within the external environment are the forces of the general environment or macro environment and the forces of the task environment or industry environment .

THE ENVIRONMENT The macro-environment Industry Operating Envrnmt Internal Environment The organization Task Environment .

It is a tool used by corporations to avoid strategic surprise and to ensure long-term health . evaluate and disseminate information from external and internal environment to the management. Thus. .Strategic Management Process Environmental Scanning Scan external environment to identify possible opportunities and threats. Scan Internal environment to ascertain strengths and weaknesses Monitor.

the external (industry) factors are more important than internal factors in a firm achieving competitive advantage. avoid weak or faltering industries. Competitive advantage is determined largely by competitive positioning within and industry.Strategic Management Process The Industrial Organization (IO) View According to IO approach. 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. finance etc. . and gain a full understanding of key external factors relationships within that industry. IO perspective requires the firms to compete in attractive industries.

Research findings suggest that approximately 20 percent of a firm¶s profitability can be explained by the industry. and level of competitiveness than on internal resources.Strategic Management Process Firm performance is primarily based more on industry properties. However. barriers to market entry. such as economies of scale. whereas 36 percent of the profitability is attributed to the firm¶s internal factors. . and operations. product differentiation. structures. capabilities.

governmental and legal forces. Products. Political. Technological forces. . demographic and environmental forces. Competitive forces. Creditors. Markets and Natural Environment. Employees. Special interest groups. Labor Unions. Communities. Stockholders.Strategic Management Process Key External Forces: ± ± ± ± ± Economic forces. cultural. Trade Associations. Suppliers. Governments. Services. Organization¶s Operating Environment: Competitors. Social. Customers. Managers. Distributors.

External opportunities /threats enable organizations to develop clear missions and strategies to achieve their objectives. . ± The choice of businesses to acquire or sell.Strategic Management Process The effects/influences of external environment on organizations operating environments give rise to opportunities and threats for the organization. External forces directly effect both suppliers and distributors. ± The 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.

to identify key external factors which are. ± Important for achieving long-term and annual objectives. Gather competitive intelligence about key external force¶s trends by using print/electronic media. . ± Hierarchical effecting overall company and functional/ divisional areas. ± Measurable. List of key external factors be communicated to all in the organization. number of managers and employees. Evaluate and assimilate the info.Strategic Management Process Get the participation of max. human resources and internet. ± Applicable to all competing firms.

The firm must consider. etc. The level of disposable income. NAFTA. . Low/ high value of dollar Gross domestic product trend Right sizing/ downsizing or derecruiting Deregulation of Industries to restrain inflation Emergence of economic blocs/ organizations like EEC. ± ± ± ± ± ± ± General availability of credit.Strategic Management Process Economic Forces The Nature and direction of economy in which firm operates. 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. stock prices. OPEC.

Strategic Management Process Social. demographic and environmental factors have impact on virtually all products. cultural. markets and customers and all sorts of organizations. and all industries are challenged by the opportunities and threats arising from these changes. Cultural. . Demographic and Environmental forces. services. Changes in social.

Governmental and Legal Forces Federal. employers and customers of organizations. state. local and foreign governments are major regulators.Strategic Management Process Political. rules for laying off employees . (Golden hand shake) under Govt. Political. governmental and legal factors can represent key opportunities or threats for both small and large organizations. subsidizers. Companies have to pay heavy penalty in shape of expensive severance packages.

Mass communication and high technology is creating similar patterns of consumption in diverse cultures world wide.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. companies relying only on domestic market may find it difficult to survive. special tariffs can affect firms significantly. subsidies. contracts. or markets for their products. facilities. import duty on raw materials. Changes in tax rates.

Internet is saving companies billions of dollars in distribution and transaction from direct sales. erasing limitations of traditional geographical markets.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. 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.

± Create shorter production runs. operations. ± Create new more powerful competitive advantage. distributors. ± Change the relative cost position in an industry. manufacturing processes. . managers and customers. customers. ± Change values and expectations of employees.Strategic Management Process Technological forces represent major opportunities and threats which should be taken care of while formulating strategies. ± Products. markets. marketing practices and competitive position. ± Create shortage in technical skills. ± Render existing products and services obsolete. Technological breakthroughs can dramatically affect. suppliers. services.

± People make a difference. threats. not just in product but the whole company. weaknesses. ± Bringing improvement. Characteristics of a competitive firm. capabilities. The most-successful purchases are in niches that add technology or a related market.Strategic Management Process Competitive Forces It is imperative in external audit to identify rival firms and determine their strengths. ± There is no substitute for quality and no greater threat than failing to be cost-effective on a global basis. opportunities. ± Innovate or evaporate. objectives and strategies. ± Understanding and remembering precisely what is your business. . tired of hearing it? Too bad. ± Market share. ± Acquisition is essential to growth. Nothing quite recedes like success.

Good competitive intelligence in business is one of the key to success. Benefits of corporate spying include increased revenues. Major competitor¶s weakness can represent external opportunity and major strength may represent key threat. Competitive intelligence is equally applicable for strategy formulation.Strategic Management Process Competitive Intelligence (CI) A systematic and ethical process for gathering and analyzing info about competitors activities and general business trends to further a business¶ own goals. lower costs and better decision making. . implementation and evaluation decisions.

customers. wiretapping. creditors. managers.Strategic Management Process Objectives of Competitive Intelligence (CI) To provide general understanding of an industry and its competitors. employees. suppliers. want ads. Sources of CI Internet. distributors. Cooperation Among Competitors Unethical tactics like bribery. . Identify areas in which competitors are vulnerable and assess the impact strategic actions would have on competitors. newspaper articles. trade journals. online interviews with celebrities and government filings. and computer break-ins should not be used in CI. Identify competitors potential moves that might endanger a firm¶s position in the market.

Strategic Management Process Industry Environment Competitive Analysis: Porter¶s Five-Forces Model. Bargaining Power of consumers. According to Model. Potential development of substitute products. the nature of competitiveness in a given industry can be viewed as a composite of five forces. ± ± ± ± ± Rivalry among competing firms. Bargaining power of suppliers. . Potential entry of new competitors. A widely used approach for developing strategies in many industries.

Michael Porter¶s Model POTENTIAL ENTRANTS Threat of new entrants INDUSTRY COMPETITORS Bargaining power of suppliers SUPPLIERS Bargaining power of customers CUSTOMS Rivalry Among Existing Firms Threat of substitute products or services SUBSTITUTES .

. The intensity of rivalry increases.Strategic Management Process Rivalry among Competing firms The most powerful of five Competitive forces. ± with the increase in number of competitors. ± By becoming more equal in size and capability. providing services. Change in strategy by one firm may be met with retaliating countermoves like lowering of prices. A successful strategy giving competitive advantage to a firm can be pursued by rival firms. enhancing quality. extending warranties or increasing advertising. adding features.

± The industry becomes Inherently unattractive. ± when product is perishable. _ Consumers can switch brands easily. ± When fixed costs are high. ± When mergers and acquisitions are common in the industry.Strategic Management Process -With decrease in demand of industry¶s products. ± Industry¶s profits decline. As rivalry among competing firms intensifies. ± Barriers to leaving the market are high. .

large capital requirement. undesirable locations. regulatory policies. sophisticated technology and know how. counterattack by entrenched firms or potential saturation of the market: . Barriers to entry include. Economy of scale. increases the intensity of competitiveness among the firms. Govt. possession of patents. lack of access to raw materials. strong brand preference.Strategic Management Process Potential Entry of New Competitors Easy entry of a firm in an industry. strong customer loyalty.

Strategist must identify new entrants. ± lower prices.Strategic Management Process New firms enter the industry with. ± Substantial market resources. . their strategies. ± High quality products. plan counter attack if required and capitalize on existing strengths and weaknesses.

or aluminum can producer. Or the firms plane for increased capacity and market penetration. competitive pressure arise when price of the substitute product decreases or consumer¶s switching cost decreases. Presence of substitute put ceiling on the price of a product. like plastic container producer competing with glass. Competitive strength of the substitute product could be measured by its market share. paperboard. .Strategic Management Process Potential Development of Substitute Products Firms are in close competition with producers of substitute products.

± There is large number of suppliers. Firms may pursue a backward integration strategy to gain control or ownership of suppliers. This strategy is effective when suppliers are unreliable. ± There are only few substitute raw materials. too costly or not capable of meeting a firm¶s demand on consistant bases. .Strategic Management Process Bargaining Power of Suppliers It affects the intensity of competition in industry when. ± When cost of switching raw materials is high.

± Consumers are concentrated or large. warranty coverage. Rival firms offer extended warranties or special services to gain consumer loyalty. ± Buy in volume. 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 can negotiate selling price. ± Products being purchased are standard or undifferentiated. .

technological. demographic. environmental. political. The Matrix can be developed in five steps. cultural. ± i) List external factors identified in external audit (about 10 to 20 factors) including both opportunities and threats. social. . legal. by writing opportunities first and than threats.Strategic Management Process The External Factor Evaluation (EFE) Matrix The matrix allows the strategists to summarize and evaluate economic. and competitive information. governmental.

0 (very important). 3 = the response is above average.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. ‡ ‡ ‡ ‡ 4 = the response is superior. . 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. 2 = the response is average.0. Appropriate weight can be determined by comparing successful with unsuccessful competitors or by discussing the factor and reaching a group consensus. and 1 = the response is poor. where. The total of all weight assigned to the factors must be equal 1.

5.0 and the lowest 1.0 indicates that the organization is responding in an outstanding way to existing opportunities and threats in its industry.Strategic Management Process Ratings are based on effectiveness of the firm¶s strategies thus company-based. The highest possible total weighted score for an organization is 4. The average total weighted score is 2. .0. ± iv) Multiply each factor¶s weight by its rating to determine a weighted score. The score of 4. or taking advantage of opportunities and minimizing effects of threats. ± v) Sum the weighted score for each variable to determine the total weighted score for the organization. whereas the weights in step 2 are industry based.

60 .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 .05 4 4 3 4 3 3 4 3 3 .15 .15 .15 .20 .05 .40 .20 .05 .10 .05 .Strategic Management Process A SAMPLE INTERNAL FACTOR EVALUATON MARTRIX Key Internal Factors Internal Strength Largest Casino in country Room Occupancy 95% in L.15 .15 .15 .05 .05 .

05 .05 .05 .10 .10 1.75 .Strategic Management Process Key Internal Factors Internal Weaknesses Most properties located in L.00 1 2 2 1 .10 2.V Little diversification Family reputation.05 . not high Recent loss of joint venture Total Weight Rating Weighted Score .10 .

± 4 = major strength ± 3 = minor strength ± 2 = minor weakness ± 1 = major weakness .Strategic Management Process The Competitive Profile Matrix (CPM) The CPM identifies a firm¶s major competitors and its particular strengths and weaknesses in relation to a competitor firm¶s strategic position. However. The weights and total weighted scores in both a CPM and EFE have the same meaning. therefore the ratings refer to strengths and weaknesses. Critical success factors in a CPM include both internal and external issues. where.

management. .Strategic Management Process For example critical success factors for firms may include advertising. union relations. Other than critical success factors. experience. price competitiveness. production capacity and efficiency. effectiveness of sales distribution. could be. breadth of product line. financial position customer loyalty. product quality. location of facilities. proprietary or patent advantages. global expansion and market share. technological advantages and e-commerce expertise.

provide the basis for establishing objectives and strategies. ± Strategy to place realistic requirements on the firm¶s resources. ± Strategy be carefully executed. Involvement of representatives of managers and employees from throughout the firm to determine firm¶s internal strengths and weaknesses . ± Strategy be consistent with conditions in competitive environment.Strategic Management Process Internal Environment Analysis The Importance of Internal Analysis Internal strengths/ weaknesses coupled with external opportunities/threats and a clear statement of mission. Three critical ingredients of a successful strategy.

and organizational resources. technology. The organizational performance will primarily be determined by internal resources. internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage. location. Physical Resources Plant and equipment. Three Basic Resources Physical resources.Strategic Management Process The Resource-Based View (RBV) According to RBV approach. human resources. raw materials and machines. . which can be grouped into three categories.

Strategic Management Process Human Resources All employees. databases. trademarks. amount. copyrights. patents. information systems. knowledge. RBV theory asserts that sources are actually what helps a firm exploit opportunities and neutralize threat. . intelligence. experience. skills. and abilities Organizational Resources Firm structure. planning processes. training. and nature of a firm¶s internal resources first in devising strategies that can lead to sustainable competitive advantage. type. accumulated experience within organization and so on. The firm must consider the mix.

Strategic Management Process Organizational Abilities The skills. 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. people. They enable the firm to take the same input factors as rivals and convert them into products and services. abilities and ways of combining assets. . nurtured and deployed throughout the firm. Finely developed capabilities can be a source of sustained competitive advantage. Core Competence A capability or skill running through a firm¶s businesses and that once identified. becomes the basis for lasting competitive advantage.

Strategic Management Process What Makes a Resource valuable? Competitive Superiority : Does the resource help fulfill a customer¶s needs better than those of the firm¶s competitors? Resource scarcity: Is the resource in short supply? Inimitability: Is the resource easily copied or acquired? Inimitability doesn¶t last for ever. Easy to imitate. ± Commodities. competitors will match or better any resource sooner than later. ± Cash. .

± Reputation for fairness. ± Unique assets (mineral rights). .Strategic Management Process Can be imitated (but may not be). ± Unique locations. ± Patents. ± capacity ± Economy of scale Difficult to Imitate ± Brand loyalty. ± Employee Satisfaction. Cannot be Imitated.

Strategic Management Process Durability: How rapidly will the resource depreciate? Substitutability: Are other alternatives available? Using Resource. Involves identifying and evaluating firm¶s resources that possess strategic value and can provide basis for future competitive advantage.Based View in Internal Analysis. .

Utilize a functional perspective. activities and processes having potential competitive advantage. Disaggregate resources: Break them into more specific competencies rather than stay with broad categorizations. 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. Separating tangible and intangible assets as well as organizational capabilities can uncover value-building resources and activities.

window decorations ± Table layout ‡ Table materials . ± Door Positioning and style. floor materials.Strategic Management Process Disaggregating a Restaurant¶s Customer Service Resource. color scheme. ‡ Theme. ± Bar positioning. Providing ease of access ± Parking (where appropriate). ± External Signs/ welcome Offering a delightful ambiance ± Floor design. ± Features/décor.

± Entertainment for queuers. . ± Visible queuing system.Strategic Management Process Providing a Special welcome ± Host greeting ± Welcome drinks/ eats ± Menu introduction ± Table decoration Ensuing waiting time at the table is´ as expected´ and as enjoyable as possible. ± Marketing literature.

‡ Job experience Motivation awards. coaching process ‡ Discipline system. ‡ Daily Meetings.Strategic Management Process Providing a customer with delightful service Developing a special relationship between waiter/ waitress and table ± Waiter selection ± waiter training/ development ‡ Personality training ‡ Assessing customers ‡ Handling disasters ‡ Coping with pressures. ‡ Menu training. ± System of gaining waiter¶s attention .

± Kitchen queuing system ± Service standards Reducing the pain of paying the bill. ± Size of Menu ± Material Menus made off ± Menu dishes ± Menu layout Providing speed of service appropriate to the occasion.Strategic Management Process Ensuring that Menu is fun to use and caters to the diners¶ needs. .

metaphors. and heroines. thing. language. myths. . symbols. Cultural products or dimensions include values.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. stories. ceremonies. beliefs. rites. and that has worked well enough to be considered valid and to be taught to new members as the correct way to perceive. rituals. saga. legends. and feel. This definition emphasizes the importance of matching external with internal factors in making strategic choices. heroes.

open. innovative. liberal. or likable. It must foster competence and enthusiasm among managers and employees . harsh. friendly.Strategic Management Process These dimensions are levers that strategists can use to influence and direct strategy formulation. The strategic management process takes place largely within a particular organization culture. aggressive. conservative. 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. implementation. and evaluation activities.

strategic changes may be ineffective or even counterproductive. If strategies can capitalize on cultural strengths.Strategic Management Process Organizational culture significantly affects business decisions and thus must be evaluated during an internal strategic management audit. . If the firm¶s culture is not supportive. like strong work ethic or highly ethical beliefs. then management can implement changes swiftly. However. The challenge of strategic management is to bring about the changes in organizational culture and individual mindsets that are needed to support the formulation. implementation. and evaluation of strategies.

carried out through social interactions. detail set of techniques and behaviors that manage anxieties. planned sets of activities that consolidate various forms of cultural expressions into one event. Also.Relatively elaborate. Ritual ± A standardized. technical consequences of practical importance. .Strategic Management Process Cultural Products or Dimensions Rites . Myth ± A dramatic narrative of imagined events. an unquestioned belief about the practical benefits of certain techniques and behaviors that is not supported by facts. usually used to explain origins or transformation of something. dramatic. usually for the benefit of an audience. but seldom produce intended. Ceremonial ± A system of several rites connected with a single occasion or event.

sometimes a combination of truth and fiction. act. Symbol ± Any object. Folktale ± A completely fictional narrative. Story ± A narrative based on true events. usually in heroic terms. Language ± A particular form or manner in which members of a group use sounds and written signs to convey meanings to each other. event. or relation that serves as a vehicle for conveying meaning. Legend ± A handed down narrative of some wonderful event that is based on history but has been blown up with fictional details. usually by representing another thing.Strategic Management Process Saga ± A historical narrative describing the unique accomplishments of a group and its leaders. .

Strategic Management Process Metaphors ± Shorthand words used to capture a vision or to reinforce old or new values. Values . Heroes/Heroines ± Individuals whom the organization has legitimized to model behavior for attitudes that serve as behavioral guidelines. Belief ± An understanding of a particular phenomenon. .

planning. motivating. and controlling.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. Planning is an up-front investment in success. staffing. and planning is the essential bridge between the present and the future that increases the likelihood of achieving the desired results. organizing. Planning enables a firm to take into account relevant factors and focus on the critical ones.

when. where. Successful organizations strive to control their own futures rather than merely react to external forces and events as they occur. what. why.Strategic Management Process Planning enables a firm to identify precisely what is to be achieved and to detail precisely the who. Strategic management can be viewed as a formal planning process that allows an organization to pursue proactive rather than reactive strategies. Planning helps ensure that the firm can be prepared for all reasonable eventualities and for all changes that will be needed. . and how needed to achieve desired objectives.

± Combining jobs to form departments ( departmentalization). ± Breaking tasks down into jobs ( work specialization ). 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. and ± Delegation authority. . Resources are allocated more effectively and used more efficiently in a well organized firm than in a disorganized firm. The organization function consist of three sequential activities.

and chain of command. business unit. deleted. The most common forms of departmentalization are functional. Changes in strategy often require changes in structure because positions may be created. Combining jobs to form departments results in an organizational structure. strategic.Strategic Management Process Breaking tasks down into jobs require development of job description and job specification. and matrix. or merged. . span of control. divisional. which lead to specialization and according to Adam Smith (Wealth of Nations published 1776) would lead to higher productivity.

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´.

Motivating .

realistic. Objectives are commonly stated in terms of. . hierarchical. Growth in sales. Earning per share and Social responsibilities.Strategic Management Process Strategic Objectives Strategic objectives or long-term objectives represent the results expected from pursuing certain strategies. understandable. challenging. measurable. ± ± ± ± ± ± ± Growth in assets. Market share. Profitability. Degree and nature of diversification. and obtainable. Objectives should be quantitative.

Strategic Management Process Clearly stated objectives help stakeholders understand their role in an organization. By making objectives through consensus. They provide basis for consistent decision making by managers whose values and attitudes differ. an organization can minimize potential conflicts later during implementation .

Strategic Management Process
Strategy Analysis And Choice
Identifying and evaluating alternative strategies should involve maximum number of managers and employees. All the participant should have the firm¶s external and internal audit information by their sides. The firm¶s external/internal audit, coupled with mission statement, will help participants to crystallize the particular strategy that could benefit the firm most. All the feasible alternate strategies be discussed and ranked in the order of attractiveness, like; ± 1. Should not be implemented.

Strategic Management Process
± 2. Possibly should be implemented. ± 3. Probably should be implemented. ± 4. Definitely should be implemented. The process will result in prioritized list of best strategies reflecting the collective wisdom of the group.

Strategic Management Process

Strategic Management Process .

Strategic Management Process .

It conforms not only to the law.Internal Environment Analysis Business Ethics and Social Responsibility Ethics A system of behaviors. . 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. expectations and morals comprising standards of conduct for a population or profession. Unethical Behavior Conduct that is considered µwrong¶ or µbad¶ in the context of a moral code.

ethical principles. and ethical rules. Ethical Standard A guidelines governing moral conduct of a particular group.Code Of Ethics A formal statement of the organization¶s values. .

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