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Composition of Strategic Management

Strategic Management is Composed

1. 2. 3. 4. Environmental scanning Strategy formulation Strategy implementation Evaluation and control

Environmental Variables
Societal Environment

Sociocultural Forces Shareholders Governments Special Interest Groups Customers

Task Environment (Industry)

Economic Forces


Internal Environment Structure Culture Resources

Employees/ Labor Unions


Trade Associations Creditors Political-Legal Forces Communities Technological Forces

Societal Environment
Composed of general forces in environment

Task Environment
Composed of

Groups in environment that directly affect or are affected by the organizations operations (Often called industry)

Internal Analysis
An asset, competency, process, skill, or knowledge controlled by the corporation

Environmental Uncertainty

Degree of complexity Degree of change

From Environmental Analysis to Industry Analysis


environment consists of suppliers, competitors and customers.


environment lies at the core of the macro environment. [Political, Economic, Social & Technological]

impacts the firm through its effect on the Industry Environment.

Some Important Variables in the Societal Environment

GDP trends Interest rates Money supply Inflation rates Unemployment levels Wage/price controls Devaluation/revaluation Energy availability and cost Disposable and discretionary income

Total government spending for R&D Total industry spending for R&D Focus of technological efforts Patent protection New products New developments in technology transfer from lab to marketplace Productivity improvements through automation

Antitrust regulations Environmental protection laws Tax laws Special incentives Foreign trade regulations Attitudes toward foreign companies Laws on hiring and promotion Stability of government

Lifestyle changes Career expectations Consumer activism Rate of family formation Growth rate of population Age distribution of population Regional shifts in population Life expectancies Birth rates

Scanning the External Environment

Analysis of Societal Environment Economic, Sociocultural, Technological, Political-Legal Factors

Market Analysis Community Analysis Competitor Analysis Supplier Analysis Interest Group Analysis Selection of Strategic Factors Opportunities Threats Governmental Analysis

Strategic Issues and Strategic Factors

Strategic Issues

Trends likely to affect future environment

Strategic Factors

Those strategic issues with high probability of occurrence and high probable impact on corporation

Issues Priority Matrix

Probable Impact on Corporation High Medium Low

High Priority Probability of Occurrence

High Priority

Medium Priority

High Priority

Medium Priority

Low Priority

Medium Priority

Low Priority

Low Priority

The Determinants of Industry Profitability

The The

value of the product to customers. intensity of competition


bargaining power at different levels within the value chain.

Industry Structure: Perfect Competition

Concentration: Entry/Exit Barriers Product Differentiation Products Information Flow

Many Firms No barriers Homogenous

Prefect Information

Industry Structure: Oligopoly

Concentration: Entry/Exit Barriers barriers

A few Firms Significant

Product Differentiation Information Flow

Potential for Differentiation Imperfect Information

Industry Structure: Duopoly

Concentration: Entry/Exit Barriers barriers Product Differentiation

Two Firms Significant

Moderate Potential for Differentiation

Information Flow

Imperfect Information

Industry Structure: Monopoly

Concentration: Entry/Exit Barriers Product Differentiation Information

One Firms High barriers No Potential for Differentiation Imperfect Information Flow

Environment Analysis/ Porter

Porters model is one of the better ways in defining industry environment five forces are bargaining power buyers bargaining power of suppliers threat of substitutes threat of potential entrants industry rivalry

More on Porter

What makes Porter different

He was the first to assert that industry profitability is not a function of technology or product attributes but of industry structure

Strategies emanate from imbalances Ability to influence industry structure determines competitive strength

How can I restore industry balance in my favor

Profit potential of an industry

Race is won both by the horse and the jockey,

Horse = industry, Jockey=Firms positioning

Profitability breakup : industry 19%, Positioning 32% Economic Profit = (price-costs)*sales volume-(cost of capital* capital invested) Or profit =f (price, costs, volume, interest rates, capital stock)

Forces Driving Industry Competition

Potential Entrants

Threat of New Entrants Relative Power of Unions, Governments, etc.

Other Stakeholders

Industry Competitors

Bargaining Power of Buyers Buyers

Suppliers Bargaining Power of Suppliers

Rivalry Among Existing Firms

Threat of Substitute Products or Services


Force 1 : threat of entry

Barriers to entry

affects price, actual entry affects volume

Capital Requirements Economies of scale Product differentiation Access to distribution channels Access to raw materials Preferential accesses [govt subsidy etc] Expected retaliation


Force 2: inter firm competition

Firms will jockey for position

Affects price, costs and volumes

Price competition, Advertising battles, Product development/ introductions, Increased service Growth is slow High fixed/ storage costs Lack of differentiation Capacity augmented in large increments Exit barriers are high etc

Can take the place of

Balance is effected when

Force 3 : threat from substitutes

Buyers propensity to substitute [Availability & willingness] Price Performance Characteristics of substitute

Force 4: barg. power of buyers

Bargaining power of buyers

Affects price
Large volume buyer Commodity vs. product Low switching costs Product earns low profits Credible threat of backward integration Purchases are significant part of cost of production

Will get affected when

Force 5: barg. power of suppliers

Bargaining power of suppliers

Affects costs
Low elasticity of substitution Differentiated product and high switching costs Credible threat of forward integration

Will get affected when

The Role of Forecasting

Environmental Scanning

Present Trends and Fashions

Forecasting Future Trends and Fashions

Assumptions for Strategic Planning and Decision Making

Popular Forecasting Techniques

Extrapolation Brain storming Expert opinion Statistical modeling Scenario writing

Methodology: Scenario Planning

Explore the local environment Extrapolate Change Drivers Decide on Level of Uncertainty and Importance Generate Impacts Outline Skeletal Scenarios Find Leverage Points for change Create Preferred Vision

Exploring the Local Environment

Understanding the Critical Indicators STEEP: Social, Technological, Economic, Environmental, Political Finding local factors of change

What new technologies are we using at work and home? What new businesses are moving into the town? And which are leaving?

Extrapolating Change Drivers

Determining sources of change Not all negative

Local Factors Change Drivers

System Structure

Deciding Uncertainty and Importance

What Change Drivers are most critical to the focus of inquiry? Which are most uncertain to predict? Which are most probable?

Importance-Uncertainty Matrix
Traditional Strategic Planning Management Importance

Scenario Planning

Daily Decision Making


Generating Impacts

First Order Impacts: 2005-2010 Second Order Impacts: 2010 2020

Diverse Significant Not all negative

Outline Skeletal Scenarios

Bulletpoint the baseline scenario Baseline means before intervention Tells the story of the system

Telling Stories About the Future

Stories have always been used to store community learning Stories convey the experience of the workshop to others Using ancient tools of storytelling

Creating Preferred Visions

Is one scenario more desirable? Is one area of the range of futures more desirable? Are there similar leverage points across scenarios?

Industry Analysis
1. Examine possible shifts in societal variable globally.
2. Identify uncertainties in each of the six forces of the task environment. 3. Make a range of plausible assumptions about future trends. 4. Combine assumptions into internally consistent scenarios. 5. Analyze the industry situation under each scenario. 6. Determine sources of competitive advantage under each scenario. 7. Predict competitors behavior under each scenario. 8. Select most likely scenario to use in strategy formulation.