Strategic Management SAINATH KEV

Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage

OverviewStrategic Leadership

Strategy Implementation Strategy Formulation

DesigningDelivering Supporting Products

Improve Operations Efficiency

Improve Operations

Effectiveness

Design Org Structure

Design Org Structure

How an Organizations strategies are effectively and efficiently managed.

Managers selects and implements a set of strategies to achieve competitive advantage.

These strategies should align both current and future vision that include adopting cloud.

Competitive AdvantageSuperior Performance

Outcome

Superior Performance Goal: Maximize shareholder value.

Challenges: Simultaneously generate high profitability and increase profits of the company.

Risk Capital

Capital that cannot be recovered if a company goes bankrupt.

Shareholders do not provide risk capital unless they believe in Org strategies leading to good returns.

Managers are obliged to invest the profits to maximize shareholder value

Shareholder Value

Returns that shareholders earn from purchasing shares in a company.

These returns comes from (a) Capital appreciation, (b) Dividends

Profitability

Return on invested capital which is the net profit over the capital investment

Net Profit = Net Income after Tax

Capital = Shareholders equity + debt

Profitable Growth

Global Presence

Increase Net profit over time by implementing and following strategies focusing competitive advantage over the rivals.

Sustained growth

Performance Pillars

Shareholder Value

Profitability / ROIC

Profit Growth

Sustainability

Effective Strategies

Deciding Factors of Shareholder Value

Competitive Advantage

Select its customers

Define and differentiate its product offerings

Create value for its customers

Acquire and keep customers

Lower costs

Produce and Deliver goods & services to the market

Organize activities within the Company

Achieve and Sustain profitability

Grow the business over time

Conceptual Business Model

Business Model

Technology

Strategies Global presence

Sector

Demand

Business model defines profitability ,competitive advantage and growth.

Expand the presence

Success depends on the industry type

Profitability + Profit growth = Success in its industry + overall performance

Performance in non-profit Organizations

Strategic Managers

Functional-Level ManagersConfined to one activity

Not responsible for overall organization performance

Develop functional strategies that help fulfil strategic objectives of overall business.

Head Office

Division A Division B Division C

Business Functions

Business Functions

Business Functions

Corporate LevelCxO, Board of

Directors

Business LevelManagers & Staff

Functional LevelManagers & Staff

Corporate Level ManagersCxO level executives who are responsible

for decision making.

Defining goals & Determining business strategy

Allocate resources to individual businesses

They are agents of shareholders

Business-Level ManagersSelf-contained division with its own

functions (Finance, Purchasing, Production, Marketing)

Translate Corporate strategy into individual business

They are the linchpins in the strategy making process. Below diagrams shows levels of strategic Managements and their roles.

Levels of Strategic Management

Strategy Making ProcessObjective: Valuable strategies often emerge within the Organization without prior planning.

Business Model(New/Existing)

Mission, Vision, Values & Goals

SWOT Strategic Choice

External Analysis: Opportunities &

Threats

SWOT Strategic Choice

Functional-Level Strategies

Business-Level Strategies

Global Strategies

Corporate Level Strategies

Governance & Ethics

Designing Org Structure

Designing Org Culture

Designing Org Controls

Strategy Formulation

Strategy Implementation

FEEDBACK

MissionDescribes what company does and focuses on

customer needs.Specifies reason for existence, Vision, Values

and GoalsDefine: Who, What and Skills offeredShould be customer oriented than a product

oriented.

Vision

Lays future state

What a company would like to achieve

Values

Defines how Managers and employees should do business.

Set of norms, standards and values that have an impact to Org mission and goals.

Strategy Making Process

• Socio economic or Macroenvironment

•Country or National environment•Global expansion.

•Environment in which Company operates

• Strategic opportunities and threats•Analysis of nature, stage, dynamics

and history of industry

Resources Capabilities

CultureCompetencies

Three components of Strategic planning process• Mission Statement• External Analysis• Internal Analysis

External Analysis: The Identification of Opportunities and Threats.

External Analysis Objectives. Objective:

A) Understanding Porter’s Five Forces Model.

B) Strategic Groups

C) Industry Life Cycle

Porter’s Five Force Model1. Identify the industry that a company competes in.

2. Industry is supply side of the market and Customer is on demand side

3. Industry vs market segments (eg: computer industry Personal computer laptops/deskotps)

1st Rule: Risk of Entry by Potential CompetitorsEconomies of Scale

a) Reduction of unit costs vs large production. b) Small org’s cannot compete with large discounts. To compete, small org’s should raise their capital.

Brand loyaltyc) Create BL through advertisement and marketing

Absolute Cost Advantagesd) Entrants cannot expect to match established companies lower cost structure.e) Key values: Superior Production and Process ; Control of organization resources,materials, skills ; cheaper funds

Switching Costsf) Critical when an org wants to move its services from a vendor to other.

Government Regulationg) Prohibition of strategic ideas or new division or new entrant into market will reduce competency and increase monopoly

Summary: If an org has an brand reputation, have an absolute cost advantage, have significant economies of scale and have significant protection – then the risk of competitors is diminished.

Risk of Potential

Competitors

Rivalry among established firms

Bargaining power of suppliers

Threat of Substitutes

Bargaining power of

Buyers

Porter’s Five Force Model Contd..2nd Rule: Rivalry Among Established Companies

Industry Competitive Structure.a) Fragment companies and flood of new entrant challenging the supply – results in price warb) Companies enter into consolidations – may result in pushing down the profits

Industry Demandc) Growing demand from new or existing customer will moderate competition between rival org’sd) Reduce in demand will increase price wars and rivalry as the Org’s should maintain their market value.e) Demand reduces when customer leave that product and result in market share loss

Cost Conditionsf) Increase in fixed cost and decrease in profits will result in bankruptcyg) Research suggests often weaker Org try to initiate the price war / reduce in prices as they struggle to cover their fixed costs.

Exit Barriersh) Exit barriers are economic, emotional and strategic factors that prevents companies leaving an industry

1. Investments that cannot be sold or reused

2. High fixed costs

3. Emotional attachment

4. Bankruptcy regulations

Porter’s Five Force Model Contd..3rd Rule: The Bargaining Power of Buyers

a) Buyer (Eg: supermarkets) who sell to end-users decide the bargaining power

b) Buyers purchase in large and has power to bargain for price reductions

c) When switching costs are low, buyers can choose multi vendors and force down prices

d) Buyers threaten to enter industry and produce their own product – result in down prices

4th Rule: The Bargaining Power of Suppliers

e) It’s a niche market with minimal or no competitors and demand is high

f) Supplier profits are not dependant on Organizations

g) Organizations would suffer high switching costs

h) Suppliers can threaten to leave industry

Porter’s Five Force Model Contd..5th Rule: Threat of Substitutes

a) The product /s of different business /s that can satisfy customer needs.

Eg: Coffee vs Tea industry.

6th Rule: Complementors

b) Those who sell products that adds value to the products of companies in an industry.

Strategic Groups

Company

Distribution Chennels

Marketing Strategies

Market segments

Customer serviceQuality of the product

Pricing policy

Advertisement policy

Industry

C1 C2B2

C3B2 C4

C1 C2

C3 C4

Strategic Group 1 Strategic Group 2

1. Companies in an Industry differ significantly with each other. The differentiating factors are listed in the diagram.

2. Companies are grouped based on their business model.

3. Companies in one group may follow a business model that is similar to other Company but different from a business model followed by Companies in different group.

4. Differences between business models depends on the company strategies. Eg: Some Organisations focus heavily on research, some focus on customer service and some on technology

B1B1 B1

Strategic Groups Contd.. Implications:

A) Companies closest competitors are those in its strategic group and not those in other groups.

B) Threat to profitability comes from its rivals who are part of same strategic group

C) Risk of potential competitors, bargaining power of buyers, bargaining power of suppliers, competition from substitutes are some of they key implications of strategic groups.

Mobility Barriers:

Barriers that prevent an organization to exit or enter into a strategic group. Eg: lack of specific skills to enter into a strategic group.

Industry Life Cycle Analysis.Embryonic

• Beginning to develop

• Growth at this stage is slow

• Factors such as high price, competing with rival, unfamiliarity with the product is high

• Embryonic can occur within an Matured Org

Growth

• Demand expands rapidly

• Threat from potential competitor is high

• Rivalry is low

Shakeout

• Demand approaches saturation levels

• Rivalry is intense• Capacities will be

added to match previous growth, resulting in excess productive capacity.

• Price war is commonly felt

• Most inefficient companies will be bankrupted.

Mature

• Market is totally saturated, demand is limited.

• Growth is low to zero.

• Threat from competitors decrease.

• Prices gets dropped.

Decline

• Growth becomes negative for different reasons.

• Rivalry increases

Industries are classified as shown below.

Limitations of Models for Industry Analysis

To understand the nature of Industry competition, Competitive forces, Strategic Groups and Life cycle models should be analysed. But these also poses following limiations.

Life Cycle Issues

• Some Orgs do not go through life cycle model. Eg: Rapid growth may occur at Embryonic stage.

• Time span between stages depends on Industry offering.

Innovation and Change

• Innovation is the major factor in industry evolution.

• Innovation is unfreezing and reshaping industry structure.

• Understanding turbulence factors is key. Eg: Innovation by new entrants will eventually cause turbulence in ROIC.

Company Differences

• Over emphasizing the importance of industry structure and underemphasizing differences among companies within a Strategic group