Strategic Management

By Kamlesh K Jangid
 Suggested Readings
• Competitive Strategy by Michael E Porter
• Competitive Advantage by Michael E Porter
• Competing for the Future by C K Prahalad
• Strategic Management by Fred David
• Management of Strategy by Hitt, Hoskisson,
Ireland
 Course Structure
• Module – 1
– Strategic Management
– Vision, Mission, Goals, Objectives, Strategy
– What strategy is NOT?, types of strategy
• Module – 2
– Structural Analysis of Industries
– Generic Competitive Strategies
 Course Structure
• Module – 3
– A Framework for Competitor Analysis
– Competitive Moves
– Industry Evolution
• Module – 4
– The Value Chain and Competitive Advantage
 What is Strategy ??
• It refers to the ideas, plans and support that firms
employ to compete successfully against their rivals.
• Strategy is designed to help firms achieve
competitive advantage.
– A Firm has the competitive advantage when it
implements a strategy competitors are unable to
duplicate or find too costly to try to imitate.
• A strategy is an integrated and coordinated set of
commitments and actions designed to exploit core
competencies and gain a competitive advantage.
 Core Competencies
• Core Competencies are resources and capabilities that
serve as a source of competitive advantage for a firm
over its rivals.
• Core competencies are often visible in the form of
organizational functions.
• For example, Marketing is a core competence for
Philip Morris, a division of the Altria Group, Inc.
• This means that Philip Morris has used its resources to
form a marketing related capabilities that in turn allow
the firm to market its products in a ways that are
superior to how competitors market their products
 In other words
• Strategy is the creation of a unique and
valuable position, involving a different set of
activities.
– Serving few needs of many customers
– Serving broad needs of fewer customers
– Serving broad needs of many customers in a
narrow market
 In other words
• Strategy requires you to make trade-offs in
competing to choose what not to do.
– Some competitive activities are incompatible; thus,
gains in one area can be achieved only at the
expense of another area.
 In other words
• Strategy involves creating “ fit ” among
company’s activities.
– FIT has to do with the ways a company’s activities
interact and reinforce each other.
– FIT drives both competitive advantage and
sustainability: When activities mutually reinforce
each other, competitors can’t easily imitate them.
 Strategic Management
• Strategic management is defined as a set of
decisions & actions resulting in formulation &
implementation of strategies designed to
achieve the objectives of an organization
• Strategic management can be defined as the art
and science of formulating, implementing, and
evaluating cross-functional decisions that
enable an organization to achieve its objectives
 Strategic Management Process
• The Steps by which management converts a
firm’s values, vision, mission, and
goals/objectives into a workable strategy;
consists of four stages: Analysis, Formulation,
Implementation, and Adjustment/Evaluation
 What strategy is NOT?
• Operational effectiveness is not strategy.
• OE is necessary but not sufficient.
• “ A Company can outperform rivals only if it
can establish a difference that it can preserve ”
 In Simple Words….
• Strategy are the means by which long term
objectives will be achieved.
• Strategy is a combination of ends(goals) for
which the firm is striving and the
means(policies) by which it is seeking to get
there.
• Different firms have different words for some
of the concepts illustrated.
 Business & Corporate Strategy
• Business Strategy: (Competitive Strategy)
– Plans and actions that firms devise to compete in a
given product/market scope or setting; address the
question “ How do we compete within an
industry? ” or “ How should we compete ?”
• Corporate Strategy:
– Diversified, Multi-business firms also need a
higher level strategy that applies to the
organization as a whole. Strategy at this higher
level is known as corporate strategy.
 Corporate Strategy
• Corporate strategy deals with the question “
What set of business or industries should the
organization operate? ”
 Competitive Strategy
• Competitive Strategy is about being different.
• It means deliberately choosing a different set
of activities to deliver a unique mix of value.
 Some Important Terms
• Vision
• Mission
• Objectives and Goals
 Vision
Vision articulates the position that the firm
would like to attain in the distinct future.
A vision is more dreamt of than it is
articulated .
Vision is a description of something (an
organization corporate culture , business ,a
technology an activity in future)
 Vision
• Vision Statements
– Answers the question: “What do we want to
become?”
• First step in strategic planning
• Oftentimes a single sentence "Our vision is to
take care of your vision.”(Stokes Eye Clinic,
Florence, South Carolina).
 Vision: Examples
• Vision of PepsiCo:
– "PepsiCo's responsibility is to continually improve
all aspects of the world in which we operate -
environment, social, economic - creating a better
tomorrow than today.“
• Vision of TATA Steel:
– We aspire to be the global steel industry
benchmark for Value Creation and Corporate
Citizenship
 Mission
• Mission is a statement that defines the role that
an organization plays in the society. Purpose is
anything that organization strives for.
• Mission is essential purpose of the
organization , concerning particularly why it is
in existence., the nature of business.
 Mission: Examples
• Mission of PepsiCo:
– Our mission is to be the world's premier consumer
products company focused on convenient foods
and beverages. We seek to produce financial
rewards to investors as we provide opportunities
for growth and enrichment to our employees, our
business partners and the communities in which
we operate. And in everything we do, we strive for
honesty, fairness and integrity.
 Mission: Examples

• Mission of TATA Steel:

– Consistent with the vision and values of the
founder Jamsetji Tata, Tata Steel strives to
strengthen India’s industrial base through the
effective utilization of staff and materials. The
means envisaged to achieve this are high
technology and productivity, consistent with
modern management practices.
 Objectives and Goals
• Objectives are open ended attributes that
denote the future states or outcomes.
• Refer to the operational side of business
• Goals are the close ended attributes& are
précised & expressed in specific terms.
• Objectives are the ends which state how the
goals will be achieved.
• An organization tries to its purpose into long
term objectives & short term goals.
 Objectives and Goals Conti..
• Different objectives are pursued like
continuity of profits, efficiency, product
quality, employee satisfaction etc.
• Goals are qualitative ,objectives are mainly
quantitative
• Thus objectives are measurable & comparable.
• An organization may pursue multiple
objectives.
 But the Reality is….
• Some firms use terms like “mission” or
“objectives” instead of “goals,” and some
firms use “tactics” instead of “operating” or
“functional policies.”
• Yet the essential notion of strategy is captured
in the distinction between ends and means.
 Course Structure
• Module – 1
– Strategic Management
– Vision, Mission, Goals, Objectives, Strategy
– What strategy is NOT?, types of strategy
• Module – 2
– Structural Analysis of Industries
– Generic Competitive Strategies
 Structural Analysis of Industries
• The essence of formulating a competitive
strategy is relating a company to its
environment.
• Key aspect of the firms environment is the
industry or the industries in which it competes.
• The state of competition in an industry
depends on five basic forces.
 Forces driving industry competition

• Threat of New entrants

• Intensity of rivalry among existing competitors
• Threat of substitute products or services
• Bargaining power of buyers
• Bargaining power of Suppliers
 Forces driving industry competition

• The collective strength of these forces

determines the ultimate profit potential in the
industry where profit potential is measured in
terms of long run return on invested capital.
 Five Forces
•Threat of New entrants 1. Barriers to Entry:
•Intensity of rivalry among • Economies of scale
existing competitors • Product Differentiation
•Threat of substitute products • Capital Requirements
or services • Switching Costs
•Bargaining power of buyers • Access to distribution
•Bargaining power of channels
Suppliers • Government Policy
 Five Forces
•Threat of New entrants 2. Expected retaliation
•Intensity of rivalry among
existing competitors 3. The entry deterring price
•Threat of substitute products
or services
•Bargaining power of buyers
•Bargaining power of
Suppliers
 Five Forces
•Threat of New entrants
•Intensity of rivalry among
existing competitors
•Threat of substitute products
or services
•Bargaining power of buyers
•Bargaining power of
Suppliers
1. Numerous or equally
balanced competitors
2. Slow industry growth
3. High fixed or storage
costs
4. Lack of differentiation or
switching costs
5. Diverse competitors
6. High Strategic Stakes
7. High exit barriers
 Five Forces
•Threat of New entrants
•Intensity of rivalry among
existing competitors
•Threat of substitute products
or services
•Bargaining power of buyers
•Bargaining power of
Suppliers
 Five Forces
•Threat of New entrants
•Intensity of rivalry among
existing competitors
•Threat of substitute products
or services
•Bargaining power of buyers
•Bargaining power of
Suppliers
 Five Forces
•Threat of New entrants
•Intensity of rivalry among
existing competitors
•Threat of substitute products
or services
•Bargaining power of buyers
•Bargaining power of
Suppliers
Structural Analysis & Competitive Strategy

• An effective competitive strategy takes

offensive or defensive action in order to create
a defendable position against the five
competitive forces. Broadly this involves a
number of possible approaches:-
– Positioning the firm so that its capabilities provide
the best defense against the existing array of
competitive forces.
Structural Analysis & Competitive Strategy

– Influencing the balance of forces through strategic

moves, thereby improving the firms relative
position; or
– Anticipating shifts in the factors underlying the
forces and responding to them, thereby exploiting
change by choosing a strategy appropriate to the
new competitive balance before rivals recognize it.
 Course Structure
• Module – 1
– Strategic Management
– Vision, Mission, Goals, Objectives, Strategy
– What strategy is NOT?, types of strategy
• Module – 2
– Structural Analysis of Industries
– Generic Competitive Strategies
 Generic Competitive Strategies
• Three Generic Strategies:-
• In coping with the five competitive forces,
there are three potentially successful strategies
approaches to outperforming the other firms in
an industry:
– Overall cost leadership
– Differentiation
– Focus
 Overall Cost Leadership
• Cost Leadership requires aggressive
construction of efficient-scale facilities,
vigorous pursuit of cost reductions from
experience, tight cost and overhead control,
avoidance of marginal customer accounts, and
cost minimization in areas like R & D, service,
sales force, advertising and so on.
 Overall Cost Leadership contii..
• Having a low cost position yields the firm
above average returns in its industry despite
the presence of strong competitive forces.
• Its cost position gives the firm a defense
against rivalry from competitors, because its
lower costs mean that it can still earn returns
after its competitors have competed away their
profits through rivalry.
 e.g. Overall Cost Leadership
• WAL MART Cost Leadership
• Offering products at EDLP, especially during its early years, when Wal-Mart was
not an established retail player, was quite difficult. The company aggressively
followed a cost leadership strategy that involved developing economies of scale
and making consistent efforts to reduce costs.

• The surplus generated was reinvested in building facilities of an efficient scale,

purchasing modern business-related equipment and employing the latest
technology. The reinvestments made by the company helped it to maintain its cost
leadership position. 

From the start, Wal-Mart imposed a strict control on its overhead costs. The stores
were set up in large buildings, while ensuring that the rent paid was minimal. The
company imposed an upper limit for its rent payment at $1.00 per square foot
during the late 1960s. Not much emphasis was laid on the interiors of the stores.
 Differentiation
• Differentiation strategies are based on
providing buyers with something that is
different or Unique, that makes the company’s
product or service distinct from that of its
rivals.
• The key assumption behind a differentiation
strategy is that customers are willing to pay a
higher price for a product that is distinct in
some important ways.
 e. g. Differentiation
• 7 – Eleven (formerly Southland Corporation) has practiced
differentiation to avoid direct competition with large supermarket
chains. It offers consumers greater convenience in the form of nearby
location, shorter shopping time and quicker check out.
• It achieves these benefits by designing a business system within the
value chain that is different from that of supermarket chains in several
key respects: smaller stores, more store locations, narrower product
line and much faster inventory turnover.
• IBM and HP achieved differentiation using after-sales service,
convenience, and quality as a means.
• Canon’s distinctive skills in fine optics, semi-conductors, precision
manufacturing and focused R & D have enabled the company to
become many customers’ preferred brand for a wide line of cameras,
including the professional Digital Rebel line, that command premium
prices
 Focus
• Focus strategies are designed to help a firm
target a specific niche within an industry.
• A major assumption of focus strategies is that
the firm can attract a growing number of new
customers and/or continue to attract repeat
buyers.
 e. g. Focus
• US based PepsiCo conducted a major restructuring exercise in 1997-98 by
spinning-off its restaurant and bottling business.

• The restructuring was aimed at achieving improved focus on the

company's core beverage (Pepsi-Cola) and snack food operations (Frito-
Lay). By successfully adopting the 'focus' strategy since 1997, PepsiCo has
emerged as the second largest consumer packaged goods company (in
terms of revenues) in the world.

• By acquiring leading beverages' company like Tropicana products (July

1998), South Beach Beverage Company (October 2000) and Quaker Oats
(December 2000), the company has significantly strengthened its
competitive position in the beverages segment.
 Course Structure
• Module – 3
– A Framework for Competitor Analysis
– Competitive Moves
– Industry Evolution
• Module – 4
– The Value Chain and Competitive Advantage
 A framework for competitor analysis

• The objective of a competitor analysis is to

develop a profile of the nature and success of
the likely strategy changes each competitor
might make, each competitor’s probable
response to the range of the feasible strategic
moves other firms could initiate and each
competitor’s probable reaction to the array of
industry changes and broader environment
shifts that might occur.
 A framework for competitor analysis

• Sophisticated competitors analysis is needed to

answer such questions as “ who should we
pick a fight with in the industry and with what
sequence of moves ?” “ What is the meaning
of that competitor’s strategic moves and how
seriously should we take it ?” “ What areas
should we avoid because the competitor’s
response will be emotional or desperate ?”
 Components of Competitor analysis

• There are four diagnostic components to a

competitor analysis
– Future Goals
– Assumptions
– Current Strategy
– Capabilities
 Components of Competitor analysis

• Before discussing each component of

competitor analysis it is important to define
which competitors should be examined.
• Forecasting competitors is not an easy task,
but they can often be identified from the
following groups:
– Firms not in the industry but who could overcome
entry barriers particularly cheaply;
 Components of Competitor analysis
– Firms for whom there is obvious synergy from
being in the industry;
– Firms for whom competing in the industry is an
obvious extension of the corporate strategy;
– Customers or suppliers who may integrate
backward or forward.
• Another potentially valuable exercise is to
attempt to predict probable mergers and
acquisition that might occur, either among
established competitors or involving outsiders.
 Components of Competitor analysis

• There are four diagnostic components to a

competitor analysis
– Future Goals
– Assumptions
– Current Strategy
– Capabilities
 Future Goals
• A knowledge of goals will allow predictions
about whether or not each competitor is
satisfied with its present position or financials
results and thereby how likely that competitor
is to change strategy and the vigor with which
it will react to outside events or to moves by
other firms.
• Knowing a competitor’s goals will also aid in
predicting its reactions to strategic changes.
 Future Goals
• Finally a diagnosis of a competitor’s goals helps
interpret the seriousness of initiatives the
competitor takes.
• A comprehensive diagnosis of a competitor’s
goals will usually include many more qualitative
factors such as its targets in terms of market
leadership, technological position, social
performance and the like.
• Diagnosis of goals should be at multiple
management levels.
 Future Goals
• There are corporate – wide goals, business unit
goals, and even goals that cab be deduced for
individual functional areas and key managers.
• The following diagnostic questions help to
determine a competitor’s present and future
goals.
 Business Unit Goals
• 1. what are the stated or unstated financial
goals of the competitor?
• 2. What is the competitor’s attitude toward
risks?
• 3. Does the competitor have economic and
noneconomic organizational values or beliefs ?
• 4. What is the organizational structure of the
competitor?
 Business Unit Goals
• 5. what control and incentive systems are in
place? How are executives compensated?
• 6. what accounting system and conventions are
in place? How does the competitor value
inventory?
• 7. What kind of managers comprise the
leadership of the competitor, particularly the
CEO?, what are their backgrounds and
experience?
 Business Unit Goals
• 8. how much apparent unanimity is there
among management about future direction?
Are their management factions favoring
different goals?
• 9. What is the composition of the board? does
it have enough outsiders to exercise effective
outside review?
• 10. What contractual commitments may limit
alternatives?
 Business Unit Goals
• 11. are there any regulatory, antitrust, or other
governmental or social constraints on the
behavior of the firm?
 The corporate Parent and The Business Unit
Goals
• 1. what are the current results of the parent
company?
• 2. what are the overall goals of the parent?
• 3. what strategic importance does the parent
attach to the particular business unit in terms
of its overall corporate strategy?
• 4. Why did the parent get into this business?
 The corporate Parent and The Business Unit
Goals
• 5. what are the corporate – wide values or
beliefs of the top management?
• 6. Is there a generic strategy that the parent has
applied in a number of businesses and may
attempt in this one?
• 7. what are the parent company’s
diversification plans?
 The corporate Parent and The Business Unit
Goals
• 8. Given the performance and needs of other
units in the corporation and overall strategy,
what sorts of sales targets, hurdles for return
on investment, and constraints on capital
might be placed on the competitor unit?
• 9. where does the corporate parent recruit
from?
 The corporate Parent and The Business Unit
Goals
• 10. What kinds of executives seem to be
rewarded by the corporate parent?
• 11. does its corporate parent or particular top
managers in the organization have an
emotional attachment to the unit?
 Portfolio analysis and competitor’s goals

• When a competitor is a part of a diversified

company, analysis of its parent company’s
collection of businesses can be a potentially
revealing exercise in answering some of the
questions just posed. Like:
• 1. What criteria are used to classify the
businesses at the competitor’s parent if a
classification scheme in use? How is each
business classified?
 Portfolio analysis and competitor’s goals

• 2. Which business are being counted on to be

cash cows?
• 3. which business are candidates for harvest or
divestment given their position in the
portfolio?
• 4. which businesses are habitual sources of
stability to offset the fluctuations elsewhere in
the portfolio?
• 5. Which businesses present defensive moves
to protect other major businesses?
 Portfolio analysis and competitor’s goals

• 6. Which businesses are the most promising

areas the parent company has in which to
invest resources and build market position?
• 7. Which businesses have lot of “leverage” in
the portfolio?
 Components of Competitor analysis

• There are four diagnostic components to a

competitor analysis
– Future Goals
– Assumptions
– Current Strategy
– Capabilities
 Assumptions
• The second crucial component in competitor
analysis is identifying each competitor’s
assumptions. These fall into two major
categories:
– The competitor’s assumptions about itself.
– The competitor’s assumptions about the industry
and the other companies in it.
 Assumptions
• Every firm operates on a set of assumptions
about its own situation. For example, it may
itself as socially conscious firm, as the
industry leader, as the low cost producer, as
having the best sales force and so on.
• These assumptions about its own situation will
guide the way the firm behaves and the way it
reacts to events. If it sees itself as low – cost
producer, for example, it may try to discipline
a price cutter with price cuts of its own.
 Assumptions
• A competitor’s assumptions about its own
situation may or may not be accurate. Where
they are not this provides an interesting
strategic lever. If a competitor believes it has
the greatest customer loyalty in the market and
it does not, for example, a provocative price
cut may be a good way to gain the position.
 Assumptions
• Examining assumptions of all types can identify
biases or blind spots that may creep into the way
managers perceive their environment.
• The blind spots are the areas where the competitor
will either not see the significance of the events at
all, will perceive them incorrectly, or will perceive
them only very slowly.
• Rooting out these blind spots will help the firm
identify moves with a lower probability of
immediate retaliation and identify moves where
retaliation, once it comes, is not effective
 Assumptions
• The following questions are directed toward
identifying competitors assumptions and also
areas where they are likely not to be completely
realistic.
• 1. What does the competitor appear to believe
about its relative position – in cost, product
quality, technological sophistication, and other
key aspects of its business based, on its public
statement, sales force and other indications? What
does it see as its strength and weakness? Are these
accurate?
 Assumptions
• 2. does the competitor has the historical or
emotional identification with particular
products or with particular functional policies,
such an approach to product design, desire for
product quality, manufacturing location,
selling approach, distribution arrangements
and so on, Which will be strongly held to?
 Assumptions
• 3. Are there cultural, regional, or national
differences that will affect the way in which
competitor perceive and assign significance to
events? To take one of many examples, West
German companies, are sometimes very
oriented toward production and product
quality, at the expense of unit costs and
marketing.
 Assumptions
• 4. Are there some policies that the companies
founder believed in strongly that may still
linger?
• 5. what does the competitor is appears to
believe about the future demand of the product
and about the significance of industry trends?
Will it be hesitant to add capacity because of
unfounded uncertainties about demand or likely
to overbuild for the opposite reason?
 Assumptions
• 6. what does the competitor appear to believe
about the goals and capabilities of its
competitors? Will it over – or underestimate
any of them?
• 7. Does the competitor seem to believe in
industry “conventional wisdom” or historic
rules of thumb and common industry
approaches that do not reflect new market
conditions?
 Significance of perceiving blind spots and
conventional wisdom
• Situation in which the recognition of outdated
conventional wisdom has been credited with
yielding great rewards is in the turnaround of
Paramount Pictures. Two new senior executives
with backgrounds in network television
management have violated many industry norms in
the movie industry – pre-selling of films, releasing
films simultaneously in a large numbers of theatres,
and so on – and registered major gains in market
share.
 History as an indicator of goals and
assumptions
• What is the competitor’s current financial
performance and market share, compared to
that of the relatively recent past?
• What has been the competitor’s history in
marketplace over time? Where has it failed or
been beaten and thus perhaps not likely to
tread again?
 History as an indicator of goals and
assumptions
• In what areas has the competitor starred or
succeeded as a company? In new product
introductions? Innovative marketing
techniques? Others?
• How has the competitor reacted to particular
strategic moves or industry events in the past?
Rationally?, emotionally?, slowly? or quickly?
To what sort of events has the competitor
reacted poorly, and why?
 Components of Competitor analysis

• There are four diagnostic components to a

competitor analysis
– Future Goals
– Assumptions
– Current Strategy
– Capabilities
 Current Strategy
• The third component of competitor analysis is
developing statements of the current strategy
of each competitor.
• A competitor’s strategy is most usefully
thought of as its key operating policies in each
functional area of the business and how it
seeks to interrelate the functions.
• This strategy may be either explicit or implicit
– one always exists in one form or the other.
 Capabilities
• A realistic appraisal of each competitor’s
capabilities is the final diagnostic step in
competitor analysis.
• Its goals, assumptions and current strategy will
influence the likelihood, timing, nature and
intensity of competitor’s reactions.
• Its strength and weaknesses will determine its
ability to initiate or react to strategic moves
and to deal with environmental or industry
events that occur.
 Financial Strengths
• Cash flow
• Short term and long term borrowing capacity
(relative debt/equity ratio)
• New equity capacity over the foreseeable
future
• Financial management ability, including
negotiation, raising capital, credit, inventories
and accounts receivables.