Module 1 An Introduction to Strategic Management

y Boeing has historically been a global leader in

manufacturing commercial aircraft.

y In 2001, Airbus had more orders than Boeing for the first

time in their competitive history.

y In 1992, Boeing and Airbus agreed to a joint study on

prospects for a super jumbo aircraft. The impetus for the study was the growing traffic in China and India.
y However, Airbus and Boeing reached different

conclusions concerning the market trends, and the joint effort was disbanded.

Boeings 787 Dreamliner

Capable of transporting 250 passengers. A point-to-point system in which smaller airports are more abundant. It can land at many more airports around the world.

Airbuss A-380
550-plus seats. Flying to larger airports that use the hub-and-spoke system. A-380 aircraft is currently able to land at approximately only 35 airports.

y More recently, Boeings strategy in regard to overall

design with the 787 Dreamliner is winning the day, as far as the order battle goes.
y Boeing attempted to speed up the process by creating an

efficient global supply chain that involves many potential customers around the world, including Japan, China, and others.
y Airbus is behind in its schedule to produce the A-380 and

its mid-sized plane.

y The A-350, has also had redesign issues. The mid-sized

A-350 is behind schedule and Airbus had to provide significant incentive discounts to increase future orders.

y Also, Airbus has been forced to produce more of its plane parts

in European countries because governments have significant ownership and provide subsidies to Airbus.
y Accordingly, these governments Spain, France, Germany and

the United Kingdom want to maintain employment levels in these countries, and thus Airbus must continue to produce primarily in European countries.
y Boeing outsources 85 per cent of the work for its 787

Dreamliner aircraft. The corresponding figure for Airbuss A380 is 15 per cent.
y As a result of the design and development delays, Airbuss

development costs for the A-380 have risen to $14 billion versus the $8 billion invested by Boeing for the 787.

y The airlines, preferred smaller aircraft which enabled

them to get to smaller airports quickly, without as many transfers on a point-to-point system.
y Additionally, Boeing followed up with the ultimate

creditors, the leasing agents, and asked what they would prefer as far as risks were concerned. Again, the leasing agents preferred smaller Aircraft which would reduce their risks in financing versus the large super jumbo A-380.
y These business-level strategies have created an

obvious advantage in terms of design for Boeing.

What's the use of running if you are not on the right road

y What Is Strategy? y Stakeholders in Business y The I/O Model and Resource-Based Model y The Relationship Between a Companys Strategy and Its

Business Model
y Vision, Mission and Purpose y Why Are Crafting and Executing Strategy Important?

y Definition:

A strategy is the determination of the basic long-term goals and objectives of an enterprise and the adoption of the course of action and the allocation of the resources necessary for carrying out these goals. A strategy is a set of decision making rules for guidance of organizational behavior.

Where are we now? Where do we want to go?

y Business(es) to be in and market positions to stake out y Buyer needs and groups to serve y Outcomes to achieve

How will we get there?

y A companys answer to how

will we get there? is its strategy

y How to please customers y How to respond to changing market conditions y How to outcompete rivals y How to grow the business y How to manage each functional piece of the business and

develop needed organizational capabilities

y How to achieve strategic and financial objectives

Four Basic Elements

y A stakeholder is any individual or organization that is

affected by the activities of a business.

y They may have direct or indirect interest in the business.

y The main stakeholders are: y Shareholders y Management and employees y Customers and suppliers y Bank and other financial organizations y Government y Trade unions y Pressure groups

y The I/O (Industrial Organization) Model adopts an

external perspective.
y It starts with an assumption that forces external to the

company represent the dominant influences on a companys strategic actions.

y The I/O Model is based on the following four

assumptions:

y The external Environment impose pressures and

constraints on firms and determines strategies that will result in superior returns.

y Most firms competing in an industry control similar sets

of strategically-relevant resources and thus pursue similar strategies. y Resources used to implement strategies are highly mobile across firms. y Organizational decision-makers are assumed to be rational and committed to acting only in the best interests of the firm.

A business model addresses How do we make money in this business?

y Is the strategy capable of delivering good bottom-line

results?

Do the revenue-cost-profit economics of the strategy make good business sense?

y Look at revenue streams the strategy is expected to

produce y Look at associated cost structure and potential profit margins y Do resulting earnings streams and ROI indicate the strategy makes sense and the company has a viable business model for making money?

y Definition of PEST Analysis:

A framework which describes the arrayed inter-dependence of macro-environmental factors used in the environmental scanning component of strategic management. y PEST is the acronym for
y Political y Economic y Social y Technological

y Political Factors
 This factors include how and to what degree a government

intervenes in the economy.  It include areas such as

Tax policy Labor law Environmental law Trade restrictions Tariffs Political stability

 Economic Factors  This factors affect the purchasing power of potential customers and the firms cost of capital. This include:
 Economic growth,  Interest rates,  Exchange rates  Inflation rate.

y Social factors
 This factors include the demographic and cultural aspects

of the external macro environment. Such as:  Health consciousness,  Population growth rate,  Age distribution,  Career attitudes and emphasis on safety. Trends in social factors affect the demand for a company's products and how that company operates.

y Technological factors
y This factors can determine barriers to entry, reduce

minimum efficient production level and influence outsourcing decisions. This factors include technological aspects such as:
 R&D activity,  Automation,  Technology incentives and the rate of technological

change.

y Environmental factors  This factors include ecological and environmental aspects such as:  Weather,  Climate, and climate change.
Which may especially affect industries such as tourism, farming, and insurance.

y Legal factors include:

 Consumer law,  Antitrust law,  Employment law,  Health and safety law.

These factors can affect how a company operates.

y Porter's five forces 1.Existing competitive rivalry 2.Threat of new market entrants 3.Bargaining power of buyers 4.Power of suppliers 5.Threat of substitute products

y This describes the intensity of competition between

existing firms in an industry. y Highly competitive industries generally earn low returns because the cost of competition is high. y A highly competitive market might result from:
y Many players of about the same size; there is no dominant

firm y Little differentiation between competitors products and services y A mature industry with very little growth; companies can only grow by stealing customers away from competitors

y The threat of a new organization entering the industry is

high when it is easy for an organization to enter the industry i.e. entry barriers are low. y Factors that can limit the threat of new entrants are known as barriers to entry. Some examples include:
y Existing loyalty to major brands y Incentives for using a particular buyer (such as frequent y y y y

shopper programs) High fixed costs Scarcity of resources High costs of switching companies Government restrictions or legislation

y This is how much pressure customers can place on a

business. If one customer has a large enough impact to affect a company's margins and volumes, then the customer hold substantial power. y Here are a few reasons that customers might have power:
y Small number of buyers y Purchases large volumes y Switching to another (competitive) product is simple y The product is not extremely important to buyers; they can

do without the product for a period of time y Customers are price sensitive

y If one supplier has a large enough impact to affect a

company's margins and volumes, then it holds substantial power. y Here are a few reasons that suppliers might have power:
y There are very few suppliers of a particular product y There are no substitutes y Switching to another (competitive) product is very costly y The product is extremely important to buyers - can't do

without it y The supplying industry has a higher profitability than the buying industry .

y Are there alternative products that customers can purchase

y y y y

over your product that offer the same benefit for the same or less price? The threat of substitute is high when: Price of that substitute product falls. It is easy for consumers to switch from one substitute product to another. Buyers are willing to substitute.

y Definition:

Key success factors are those competitive factors that most affect industry members ability to prosper in the marketplace.
y The companies that standout or excel on a particular KSF

are likely to enjoy a stronger market position being distinctively better than rivals on one or two key success factors tend to translate into competitive advantage.

y Common types of industry key Success factors

y Technology related KSFs. y Manufacturing related KSFs. y Distribution related KSFs. y Marketing related KSFs. y Skills and Capability related KSFs. y Other types of KSFs.

y The driving forces in an industry are the major

underlying causes of changing industry and competitive conditions- they have the biggest influence on how the industry landscape will be altered.

y Driving forces Analysis: 1. Identifying what the driving forces are. 2. Assessing whether the drivers of change are, on the

whole, acting to make the industry more or less attractive. 3. Determining what strategy changes are needed to prepare for the impact of the driving forces .

1. Emerging new internet Capabilities and 2. 3. 4. 5. 6. 7.

Applications Increasing Globalization. Changes in an Industry Long Term Growth Rate. Changes in who buys the Product and how they use it. Product Innovation. Technology Change & Manufacturing Process Innovation. Marketing Innovation.

8. Entry or Exit of Major Firms. 9. Diffusion of Technical Know how across more 10. 11. 12. 13. 14.

companies and more countries. Change in cost and efficiency. Growing buyer preferences for differentiated products instead of a commodity product. Reduction in uncertainty and Business Risk. Regulatory Influence and government Policy Changes. Changing Societal Concerns, attitudes and life styles.

y Definition of Strategic Group

A strategic group is the group of firms in an industry following the same or a similar strategy along the strategic dimensions
y Strategic Group Mapping is a valuable tool for

understanding the similarities, differences, strength, and weaknesses inherent in market positions of rival companies. y Rival in the same or nearby strategic group are close competitor, whereas rival in distinct strategic groups usually pose little or no immediate threat.

y Identification of close and distinct drivers. y Identification of attractive and unattractive position of the

forma in industry. This attractiveness depends upon the industry driving forces, prevailing competitive pressures and profit potentials of different strategic groups. y Strategic group mapping helps in identifying the strategic group a firm should consider entering. y It helps in analyzing the type and level of entry barriers the firm will face. y It also exam in the number and types of barriers the firm will face.

y GOODNESS OF FIT TEST

y How well does strategy fit the firm s situation?

y COMPETITIVE ADVANTAGE TEST

y Does strategy lead to sustainable competitive advantage?

y PERFORMANCE TEST
y Does strategy boost firm performance?

y A compelling need exists for managers to proactively

shape how a firms business will be conducted.

y A strategy-focused firm is more likely to be a strong

bottom-line performer than one that views strategy as secondary.

Excellent execution of an excellent strategy is the best test of managerial excellence and the most reliable recipe for winning in the marketplace!