strategic management 1 notes nust zimbabwe

MR J. RANGANAIEMAIL: [email protected]

0772 122 120 /0733 236 657/0713 421 422

Strategic Management CBU 4107

Conceptualizing & Defining Strategy

*Merely playing in the marketplace with a gun loaded with hope

and little else is not courage nor strategy. It is important to define

how you intend to win. How will you play? You cannot let fate

answer that question unless you are insane (Kamwendo;2014)*Oh what a king,sitteth not down first and consulted whether he be able with ten thousand to meet him that cometh with twenty thousand (Luke 14 verse 31 )*STRATEGY is the direction and scope of an org over the

long term, which achieves competitive advantage in a changing

environment through its configuration of resources and

competencies with the aim of fulfilling stakeholder expectations. (Adapted Johnson et al 2006)

Defining Strategy: Mintzberg `s five fold definition

*Further ,pursuant to defining strategy, it is Mintzberg et al

(2009) who came up with the most holistic definition of strategy which is fivefold, that is defines strategy from

five perspectives as follows:(i) Strategy as a plan: from this perspective, strategy is

some sort of consciously intended course of action, a guideline (or set of guidelines) to deal with a situation

- As a plan, strategy is thus a direction, a guide or course of action into the future or a path to get here from there.

(ii) Strategy as a pattern: Here ,strategy is seen as a pattern in a stream of actions.

-It is the aggregate of behaviour that can be consistently observed in an organisation over time.


(ii) Strategy as a pattern (Deliberate & Emergent strategies) : Mintzberg and Quinn (1996) distinguish deliberate strategies as those where intentions that existed previously were realized, from emergent strategies, where patterns developed in the absence of intentions, or despite them, went unrealized.


(i11) Strategy as a position: Here strategy reflects specifically a means of locating an organization in what organizational theorists call an “environment”

-By this defination,strategy becomes the mediating force -

or “match” according to Hofer & Schendel (1978) – btwn the

org & the environment, that is,btwn the internal and external

context(iv) Strategy as a ploy: Here Mintzberg et al (2009)

highlight strategy as a specific manoeuvre intended to outwit a competitor


(v) Strategy as perspective*Here strategy is seen as:-An ingrained way of perceiving the world-As the organisation`s fundamental way of doing doings (Mintzberg et al 2009)-As a theory of business (Drucker;1994) -Or as the personality of the organisation (Barman and Petersson ;2002,Mintzberg and Quinn;1996).

Discussion Point

(i) Using Mintzberg (2009) `s five fold definition of strategy, discuss strategy in the Zimbabwean corporate context [15marks]

(ii) ‘Proffessor Henry Mintberg asserts that an organisation `s realised strategy may differ from its realised strategy’.Assess why an organisation `s realized strategy may differ from its intended strategy [10 marks]

CLASSIFICATION OF STRATEGY

*Many typologies can emerge from the concept of strategy

when it is seen from different perspectives. Pursuant to that, a review of literature on strategy shows that many typologies exist. Thus strategy can be classified on the following basis;a) On a generic basisb) According to levels in an organisationc)On the basis of corporate directiond) Based on the match between product and market

focuse)According to the intensity of competitionf)On the basis of intention vs realization

(i) Classification of strategy on a generic basis

*One of the most popular typologies of strategy, based on Porter (1985) `s generic strategies, the typology delineates strategy into three classes, that is;

i. Overall Cost Leadership Strategyii.Differentiation Strategyiii.Focus Strategy

(ii) Classification according to levels in an org

*One of the most popular classifications of strategy is according to levels in an organisation as follows:

Global level strategies are pursued by organizations while they expand their operations in international business so as to increase their profitability

-corporate level strategy: concerned with the overall scope of an organisation and how value will be added to the different parts(business units) of the org.

- business level strategy: according to Johnson et al (2006) can be conceptualised in terms of how to compete successfully in particular markets.

-operational strategy: concerned with how the component parts of an organisation deliever the corporate and business level strategies in terms of resources ,processes and people

Classification on the basis of corporate direction

*Here strategy is viewed from a corporate directional perspective such that four sub-types of strategy emerge:

Growth Strategy: expansion driven by increased market penetration and development, horizontal integration, vertical integration or diversification.

Stability Strategy: implemented on a steady as it goes approach in order to consolidate or maintain a firm`s competitive position

Retrenchment Strategy: based on reduction in product/service lines, markets or functions

Combination Strategy: a multi-strategy approach whereby there is justification for pursuing one strategy in some Strategic Business Units and another in the others

Classification on the basis of the match between product & market

focus

*Through matching product development and market

position, four alternative growth strategies based on

the Ansoff matrix as follows: Market Penetration Market Development, Product Development Diversification

Classification on the basis of intention vs realization

* Henry Mintzberg introduced two terms to help clarify the shift that often occurs between the time a strategy is formulated and the time it is implemented.

An intended strategy (i.e., what management originally planned) may be realized just as it was planned, in a modified form, or even in an entirely different form

Occasionally, the strategy that management intends is actually realized, but the intended strategy and the realized strategy—what management actually implements—usually differ

Classification on the basis of intensity of competition

*By looking at strategy on the basis of intensity of competition, Red Ocean Strategy and Blue Ocean Strategy emerge as the strategy sub-types.(i)Red Ocean Strategy: focuses on head on rivalry

with competitors in existing markets, such that competitive rivalry creates intense competition that is analogous to bloody shark-infested waters.

(ii)Blue Ocean Strategy, as conceptualised by Kim and Mauborgne (2005) is a strategic framework whereby a business focuses on creating new demand, directing its strategic compass on uncontested market space, making competition irrelevant thus realising disproportionately high growth and profitability.

Factors that Shape a Company’s Strategy

EXTERNAL FACTORS(a) PESTLE I considerations(b) Competitive conditions and overall industry

attractiveness - company’s strategy should be tailored to match the mix of competitive factors at play such as:

price, product quality, service as well as industry changes in industry structure, technology developments, changing buyer needs and expectations etc.

(e)The org ’s market opportunities and threats ;- Strategy should involve crafting offensive moves to capitalize on the most promising opportunities and crafting defensive moves to protect the org’s competitive position and long-term sustainability.

Factors that Shape a Company’s Strategy

INTERNAL FACTORSCompany resource endownments, competitive

capabilities and competencies ;- strategy depends on availability of resources, capabilities and competencies needed to execute the strategy proficiently.

The backgrounds, personal ambitions, business philosophies and ethical beliefs of managers ;- Strategy can be influenced by a managers personal values, experiences and emotions either deliberately or sub-consciously.

Influence of shared values and company culture ;- an org `s practices, traditions, philosophical beliefs and way of doing things combine to create a distinctive culture that will impact on strategy development & implementation

Tests of a Winning Strategy

(i) The Goodness of Fit Test -A good strategy has to match the industry and competitive conditions, market opportunities, threats and other external environmental aspects. -It should also fit in with its company’s resource strengths as well as weaknesses.(ii) The Competitive Advantage Test ;- A good strategy leads to a sustainable competitive advantage.(iii) The Performance Test;- A good strategy should boost company performance, company's competitive strength and long term market position.


(iv) E-V-R Congruence – A winning strategy should have coherence & intergration in terms of the environment, resources & organizational value system. (v) Distinctiveness – Another test of a winning strategy is whether it gives the org something different from competitors.-A distinctive position in the market place allows a firm to develop an identity that customers can notice.-Distinctiveness relates to parts of the strategy that the org `s customers can see & experience.


(vi) Sustainability – One of the toughest test of a winning strategy is whether it leads to the organisation developing the attributes that will allow it to survive & thrive over the long term.Discussion Point: Given that the hallmark of strategy is to achieve superior performance, evaluate any five parameters that could be employed as tests of a winning strategy [20 Marks]

Strategic Management

*Strategic management consists of the analysis,decisions,and

actions an org undertakes in order to create and sustain competitive advantages. Dess et al (2005).This definition captures two elements @ the heart of

strategic management:(a) Strategic management of an organization entails

three ongoing processes: analysis, decisions & actions.(b) The essence of strategic management is the study of

why some firms outperform others, leading to two fundamental sub-questions;

How should we compete in order to create competitive advantages in the marketplace?

How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute?

Strategy & Strategic Management

Strategic management is a broader term than strategy and is a process that includes top management’s analysis of the environment in which the org operates prior to formulating a strategy, as well as the plan for implementation and control of the strategy.

The difference between a strategy and the strategic management process is that the latter includes considering what must be done before a strategy is formulated, implementation of the strategy as well as assessing the success of an implemented.

Strategic Management Process

*The strategic management process can be summarized in five steps:1.Strategic Analysis which is split as follows:(a) Internal Analysis: Analyze the org ’s strengths and weaknesses in its

internal environment. Internal analysis is based cultural analysis (vision & mission),strengths & weaknesses (SWOT Analysis),resource focused analysis, value chain analysis or Mckinsey 7s framework.

(b) External Analysis: Analyze the opportunities and threats, or constraints, that exist in the org ’s external environment, including industry and forces in the external environment. External analysis is supported by PESTELI Analysis,SWOT Analysis, Five Forces Model,SPECTACLES Analysis, Competitor Analysis, Strategic Group Analysis etc

2. Strategy Formulation: Formulate strategies that build and sustain competitive advantage by matching the org ’s strengths and weaknesses with the environment’s opportunities and threats. Functional, business level (competitive) & corporate strategies are formulated.

3. Strategy Implementation: Execute the strategies that have been developed.

4. Strategic Control and Evaluation: Measure success, provide feedback, & make corrections when the strategies are not producing the desired outcome.

Theoretical Influences on Strategic Management

(i) Industrial organization (IO) A branch of microeconomics, emphasizes the

influence of the industry environment upon the firm. The central tenet of IO theory is the notion that a

firm must adapt to influences in its industry to survive and prosper; thus, its financial performance is primarily determined by the success of the industry in which it competes.

Industries with favorable structures offer the greatest opportunity for firm profitability.

Posits that’s its more important for a firm to choose the correct industry within which to compete than to determine how to compete within a given industry.


(ii) Resource-based theory Views performance primarily as a function of a firm’s

ability to utilize its resources. Although environmental opportunities and threats are

important, a firm’s unique resources are key variables to the development distinctive competences & creation competitive advantage.

An org ’s resources are directly linked to its capabilities, which can create value and ultimately lead to profitability for the firm.

Resources can be a sustainable source of competitive advantage if they are;

- valuable & rare -not subject to perfect imitation-without strategically relevant substitutes


(iii) Contingency theory The most profitable firms develop beneficial fits with their

environments. In other words, a strategy is most likely to be successful

when it is consistent with the org ’s mission, its competitive environment, and its resources.

Perspective a middle ground perspective that views organizational performance as the joint outcome of environmental forces and the firm’s resources.

Firms can become proactive by choosing to operate in environments where opportunities and threats match the firms’ strengths and weaknesses.

Should the industry environment change in a way that is unfavorable to the firm, its top managers should consider leaving that industry and reallocating its resources to other, more favorable industries.

Benefits of Strategic Management

Principal benefit of strategic management has been to help organization formulate better strategies.

Ensures a sense of purpose & directionHigh level of strategic fit with the environment

because of enhanced awareness of & understanding the environment

Allows an org to be more proactive than reactive in shaping its own future i.e. it allows an org to initiate and influence the future.

Involvement in the process results in a high level of affective commitment in the org.

Benefits of Strategic Management

Creativity and innovativeness when employees understand and support the firm’s mission, objectives, and strategies.

Allows for identification, prioritization & exploitation of opportunities

Ensures that organizations prosper even in harsh operating environments

Allows org to enhance their performance through collaborative relationships

It helps integrate the behavior of individuals into a total effort

Why Some Firms do not formulate strategies

a) Lack of knowledge or experience in strategic planning

b) Firefighting— An org can be so deeply embroiled in resolving crises & firefighting that it reserves no time for planning.

c) Waste of time & resources—Some firms see strategic planning as a waste of time because the strategies are not implemented

d) Laziness—People may not want to put forth the effort needed to formulate a plan.

Why Some Firms do not formulate strategies

g) Content with success — Particularly if a firm is successful, individuals may feel there is no need to plan because things are fine as they stand.

h) Overconfidence—As managers amass experience, they may rely less on formalized planning.

i) Prior bad experience—People may have had a previous bad experience with planning, that is, cases in which plans have been long, cumbersome, impractical, or inflexible managers may not be committed to planning.

Pitfalls in Strategic Planning

*Some pitfalls to watch for and avoid in strategic planning are these:

Viewing planning as unnecessary or unimportant

Doing strategic planning only to satisfy accreditation or regulatory requirements

Moving too hastly from mission development to strategy formulation

Failing to communicate & involve key employees in all phases of planning

Top managers making many intuitive decisions that conflict with the formal plan

Pitfalls in Strategic Planning

Delegating planning to a “planner” rather than involving all managers

Failing to create a collaborative climate supportive of change

Being too formal in planning & implementation that flexibility and creativity are stifled

Critique of Strategic Management

Models are too complex or too simplisticStages in the process are so closely interrelated

and that considering them as independent steps may be counterproductive.

Still others, such as Mintzberg, argue that planning models stifle the creativity and imagination that is central to formulating an effective strategy

Can be a waste of time if strategy is not implemented

Can lead to constant changes that may alienate key stakeholders

Strategic Decisions

*It is also important to distinguish between strategic decisions and common management decisions. In general, strategic decisions are marked the following

distinctions:(i)Magnitude: They affect an entire org or a large part of it

as well as beyond.(ii)Time-scale – strategic decisions set the direction for

the org over the medium to long term.(iii)Commitment: Strategic decisions involve making

choices & committing resources in ways that cannot be reversed cheaply or easily.

(iv)Systematic: They are based on a systematic, comprehensive analysis of internal attributes and factors external to the organization.

Strategic Decisions

(v) Orientation: They future-oriented but are built on knowledge about the past and present.

(vi) Focus: They seek to capitalize on favorable situations outside the org and minimize on the effects of external threats as well.

(vii) Impact: They involve choices. Although making win-win strategic decisions may be possible, most involve some degree of trade-off between alternatives—at least in the short run.

Strategic Decisions: Role of Chief Executive

Provides strategic leadership to the orgStrategic decision making is generally

reserved for the top executive and members of his or her top management team

The CEO is the individual ultimately responsible for the organization’s strategic management but s/he rarely acts alone.

There wont be no effective strategic planning in an org in which chief executive does not give firm support.

Strategic Decisions: Role of Business Unit Heads & other

managers

The CEO relies on a team of top-level executives & business unit heads for strategic input

Thus CEO generally involve the heads of functional departments in strategic decisions

The degree of involvement of top & middle managers in the strategic mngt process also depends on the personal philosophy of the CEO

Input to strategic decisions, however, need not be limited to members of the top mgnt team.

Strategic Decisions: Role of Corporate Players: Board of Directors

*The Board of Directors normally approves all decisions that affect long-term performance of the Corporation* The Board carries out three basic tasks for strategic management. a) Monitoring: The Board should be aware of the developments within and outside the organization and bring it to the notice of the management.b) Evaluation: A Board should analyze the plans, decisions and actions of management and highlight the positive and negative side of the issues and suggest alternatives. c) Initiative and determination: continuously assess corporate mission, specify strategic options, make policy decisions

Role of Board of Directors: Theoretical Perspectives

(i) Managerial Hegemony Theory: Boards are a legal fiction dominated by management because of:

Separation of ownership & control Information Asymmetry Management `s reduced dependence on

shareholders for capital

Role of Board of Directors: Theoretical Perspectives

(ii) Agency TheoryAgency theory suggests that the firm can be viewed as a nexus of

contracts (loosely defined) between resource holders.Principals (shareholders) delegate work to the agents (managers),an

arrangement in which conflict of interest is inevitable.Agency theory assumes that managers are likely to satisfice rather

than profit maximise on behalf of the principal.Agency theory argues that the major role of the board is to reduce the

potential divergence of interest between shareholders & management, minimizing agency costs and protecting shareholders` investments.

Agency Theory Problem

The agency problem occurs when: the desires or goals of the principal and agent

conflict and it is difficult or expensive for the principal to verify that the agent has behaved inappropriately

Solution: Principals engage in incentive-based performance

contracts Monitoring mechanisms such as the board of

directors

DEVELOPING STRATEGIC VISION,MISSION, VALUES,CONCEPT OF BUSINESS MODEL

ESTABLISHING COMPANY DIRECTION

Vision

Is description of the ideal future towards which the firm is moving.

Represents an ideal destiny that is massively inspiring & evokes passion by inducing managers & other employees to reach

Represents the dream & strategic intent of the org, such as industry leadership on a national or global scale, to overtake market leaders, pioneer new technological discoveries etc.

Corporate vision concerns the whole org & business unit vision focuses on an individual business unit.

Vision forms the inspirational foundation for managers in relation to strategic decision making

E.g of vision statement: A car in every garage (Ford Motor Company,1920)

A good vision should be;- Clear Inspiring Realistic Creative

Why visions fail

Walk doesn't match the talkIrrelevanceVisions are not a panacea for all

organisational problemsIdeal future not reconciled with the present

Mission Statement

Mission – a foundational statement that describes the org `s fundamental purpose i.e. the reason why it exists.

It shows the following ;- Definition of the business Its distinctive competence Indications of its future directionE.g of a mission statement: Southwest Airlines is dedicated to

the highest quality service delivered with a sense of warmth,friendliness,individual pride & company spirit.

A good Mission Statement should be: Clear Acceptable to stakeholders Defines what the org is Limited enough to exclude some ventures & broad enough to allow for creative growth. Sufficiently clear to be widely understood throughout the

organization Serve as a framework for evaluating both current and prospective

activities. Distinguishes a given org from the others.

Values

The principles that orgs are committed pursuant to achieving their visions & missions

They define what your business stands for — they are your core rules.

They provide the bounds or limits of how the employees will conduct their activities while carrying out the vision and mission.

They are statements about how the organization will value customers, suppliers, and the internal community.

Once defined, the values that are important to your organization should be reflected in everything you do.

Corporate goals & objectives

*Objectives and Goals Objectives and goals are used interchangeably

but there is a subtle distinction between these two terms.

Objective is the end, which the organization tries to achieve through its operations. „

Goal is an open-ended statement,which does not quantify what needs to be achieved, and time frame for completion.

So „growth‟is a goal whereas an objective is to achieve 10% growth in terms of market share


*Some areas in which a corporate might establish its goals & objectives are:ProfitabilityEfficiencyGrowthSurvivalShareholder WealthReputation


Technological LeadershipUtilization of resources (ROI or ROE)Market LeadershipContribution to employees (job security,

competitive remuneration & good working environment,fullfilling jobs)

Contribution to society (taxes,charity & needed products)

Market Leadership

Corporate Culture

Is the aggregate of beliefs, expectations & values learned and shared by a corporation `s members & transmitted from one generation to another.

Reflects the values of the founder (s) & mission of the firm

Give the company a sense of directionIncludes the dominant orientation of the companyIt includes a number of informal work rules (“the

company way”) that employees follow without question.

Work practices over time become the company `s tradition

Attributes of Corporate culture

i) Cultural Intensity: The degree to which members of an org accept the norms, values or other cultural content associated with the unit.

Cultural intensity reflects the cultural depth of an org

Attributes of Corporate culture

(ii) Cultural Integration: This is the extent to which units in throughout the org share a common culture.

Cultural integration reflects the company `s cultural diffusion

In contrast, a company that is structured into diverse units by functions or divisions usually exhibits some sub-cultures & a less integrated corporate culture

Importance of corporate culture

A source of sustainable competitive advantage

Conveys a sense of identity for employees Adds to the stability of the organisation as a

social systemServes as a frame of reference for employees

to make sense of organisational activitiesAs a guide for appropriate behaviour

Concept of Business Model

A conceptual tool containing a set of objects, concepts and their interrelationships with the objective to express the business logic of the firm.

How an organisation manages its incomes and costs through structural arrangement of its activities.

A company `s method for making money in the current business environment.

It includes key structural & operational characteristics of a firm – how it earns revenue & makes a profit

Elements of a business model

*A business model is composed of five elements: Who it serves What it provides How it makes money How it differentiates and sustains competitive

advantage*The simplest business model is to provide a

good or service that can be sold so that revenues exceed costs & expenses. Other business models can be much complicated.

Types of Business Models

(i) Customer Solutions Business Model: making money not by selling products per ser but solutions that provide certain benefits.

(ii) Profit Pyramid Model: offering a full line of products to close any niches where a competitor might find a position.

-Customers adopt an org `s products up to the most profitable range.

(i) Multi-component model: product is a system,not just one product, with one component providing most of the profits.


(iv) Advertising Model: Model offers products for free or very cheap in order to make money on advertising.Model originated in newspaper industry & is heavily used in commercial radio & television.Some internet based businesses offer free services to users in order to expose them to advertising that helps them make money.


(v) Switchboard Model: firm acts as an intermediary connecting multiple sellers to multiple buyers.

(vi) Time Model: Product R &D and speed are the keys to success in the time model e.g being first to market with a new innovation allows Sony to earn high margins.Once others enter the market with lower margins,its time to move on.

(vii) Efficiency Model: company awaits until a product becomes standardised & then enters the market with a low-priced,low margin product that appeals to the mass market e.g Wal Mart & SouthWest Airlines


(viii) Blockbuster Model: In industries such as pharmaceuticals & motion picture studios, profitability is driven by key products.The focus is high investment in a few products with high potential payoffs-especially if they can be protected by patents.

(viv) Profit Multiplier Model: The idea is to develop a concept that may not make much money on its own but can spin off other profitable opportunities e.g a football team makes money not only from gate takings but from selling players,advertising,television rights,selling memorabia like jerseys etc


(x) Entrepreneurial Model: Company offers specialized products /services to market niches too small to be worthwhile to large companies but have potential to grow quick

*In order to understand how business models work, it is important to learn where on the value chain company make its money

INTERNAL ANALYSISEXTERNAL ANALYSIS

Strategic Assessment

INTERNAL ANALYSIS

a) SWOT Analysis (as well as external analysis)

b) Mckinsey 7 ‘s’ frameworkc) Value Chain Analysisd) Resource Based Approach to

Organizational Analysis

SWOT ANALYSIS

• Involves carrying out a Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis

• Threats; negative impacts from the external environment that could decrease the company’s sales and profits e.g. competitor actions, economic changes, political instability etc.

• Opportunities positive impacts from the external environment that a company could use to increase its sales and profits e.g. economic growth, new market, improved technology etc.

• Opportunities and threats are derived from the external analysis

• Strengths; strong internal aspects of the company relative to its competitors. E.g. resource capabilities, strong management, skilled workforce etc.

• Weaknesses; weak internal aspects of the company relative to its competitors e.g. poor structure, lack of systems, poor management.

• Strengths and weaknesses are derived from internal analysis.

Example: SWOT Analysis for Econet Wireless Ltd

• Type of Factor

FavourableFavourable UnfavourableUnfavourable

LocationOf

Factor

Internal

External

STRENGTHS•Strong brand name•Passionate & hardworking mngt team•Strong resource base•Economies of scale

WEAKNESSESOver-relianceon relationships

OPPORTUNITIES•Growing internet market•Largely unbanked rural market•Effective demand & positive attitude to mobile phone services

THREATS•Intense competition•Market liquidity challenges•Inadequacy of power supplies•High Unemployment rate in Zim

Mckinsey 7s framework

*The Mckinsey 7s framework is a very comprehensive and better alternative to SWOT Analysis in respect of analyzing the intenal environment.

Strategy: the plan devised to maintain and build competitive advantage over the competition.

Structure: the way the organization is structured and who reports to whom.

Systems: the daily activities and procedures that staff members engage in to get the job done.

Mckinsey 7s framework

Shared Values: called "superordinate goals" when the model was first developed, these are the core values of the company that are evidenced in the corporate culture and the general work ethic.

Style: the style of leadership adopted. Staff: the employees and their general

capabilities. Skills: the actual skills and competencies

of the employees working for the company.

VALUE CHAIN ANALYSIS

Concept of the Value Chain

• A company’s value chain identifies the primary activities that create value for customers and the related support activities.

• Each activity in the value chain incurs costs and ties up assets.

• The costs incurred in performing each activity can be broken down into primary costs and activities and support costs and activities

• Value is created when the market value of the product is more than the total cost of organizational inputs involved in creating the product

Value Chain Activities

• Primary Activities;- activities that are at the core of the company’s operations in producing the product or service such as; Inbound logistics (raw material handling, warehousing, order

processing etc.) Operations (machining, assembling, packaging testing) Outbound logistics (warehousing, distribution, shipping) Sales and marketing (advertising, promotions, pricing, market

research) Service (installation, repair services, technical assistance)

• Support (Secondary Activities) ;- facilitate the smooth running of the primary activities and include; Human resources management (selection, recruitment,

training etc) Procurement (various intangible & tangible inputs. Technology(support services) Firm infrastructure (Land, buildings)

Examples of Using the Value Chain to Create Cost Advantages

• Simplifying product design• Stripping away extras• Shifting to a cheaper less capital intensive

process• Relocation to premises closer to supplier of

key input• Relocation closer to market• Outsourcing some non/key secondary activities• Streamlining the workforce.• Optimizing inventory management

Resource Based Approach to Organisational Analysis

*Resources are an org `s assets which are the basic building blocks for competitive advantage.

• A resource is an asset, competency, process, skill or knowledge controlled by the company.

• It is a strength if it provides the company with a competitive advantage.

• It becomes a weakness if the organisation does not possess the resources that the other competitors do possess or if it is a key success factor in the industry.

Types of Resources

• Tangible– Financial; borrowing capacity, internal funds

generation– Physical;- plant and equipment, location, technology,

raw materials etc

• Intangible– Reputation; brand name, customer base, relationship

with suppliers– Culture;- shared values

• Human– Skills and knowledge, Motivation, flexibility and

adaptation, loyalty.

Sustainability of a Resource as a source of Competitive Advantage

There are four important characteristics:• Durability; the time it takes before the

resource becomes obsolete• Transparency; the rate at which competitors

can learn the relationship of the resource and its capability in supporting the company’s successful strategy

• Transferability; the rate at which competitors are able to acquire the resource and capability

• Replicability; the ability of competitors to duplicate the resource and capability of the company so as to imitate its successful strategy.

Resources: Capabilities & Competencies

(i) Capabilities: refer to an org`s ability to exploit its resources through organizational processes & routines that manage the interactions among the resources to turn inputs into outputs.

(ii) Competency: is cross functional integration & co-ordination of capabilties e.g a competency in NPD in a division may be as a result of intergrating HR,Mkting,R&D & production capabilities in that division.

Resources: Capabilities & Competencies

(iii) Core Competences: Collection of core competencies that cross divisional boundaries,is widespread within the corporation & is something the corporation does exceedingly well.

(iv) Distinctive Competencies: core competencies that are superior to those of competition.

*E.g 3M is known for its distinctive competence in New Product Development,General Electric for its distinctive competency in management development.

External Assessment

a) PESTLE Analysisb) SPECTACLES Analysisc) Competitor Analysisd) Strategic Group Analysise) Porter `s Five Forces Modelf) Porter `s Four Corner Analysis Model

PESTLE I Analysis

(i) Political Factors Political stability Influence of Political parties Gvt, gvt bodies & quasi-gvt bodies Gvt ideology e.g. free market or socialist thrust Changes in gvts Gvt policies

(ii) Economic factors GDP per capita(income levels) Income distribution Interest rates Inflation Exchange rates Stock Market Performance

PESTLE I Analysis

(iii) Social FactorsCultureDemographic TrendsSocial expectationsCustomer tastes and preferencesEducational levels(iv) Technological FactorsRate of innovation Globalization Infrastructural RequirementsInformation technologyResearch & Development

PESTLE I Analysis

(v)Legal Factors: Relates to how the legal framework affects corporate strategy:

Regulatory framework & competitiveness Legal framework & resources (tangible & intangible

resources) Legal framework & growth Legal framework & marketing of goods Legal framework & corporate governance(vi) Environmental /Ecological FactorsRaw materialsCost of energyPollution & green imperativesBusiness & climate changeDiscovery of new natural resources

PESTLE I Analysis

(vii) International Factors: The aggregate of factors that include world economic,political,socio-cultural,technological,environmental,legal framework & other imperatives.

SPECTACLES Analysis

*Cartwright (2002) takes a detailed approach to assessing the environmental factors under which the activities have to be conducted and decisions taken under a ten point acronym SPECTACLES.

(i)Social: changes in society & societal trends, demographic trends & influences.

(ii)Political: political processes & structures,political institutions & their influence on business

(iii)Economic: referring to sources of finance,stock markets, inflation,interest rates, property prices,local,regional,national & global economies.

(iv)Cultures; local,regional & international,cultural changes,cultural pressures on organizational activities.

SPECTACLES Analysis

(v) Technological:technological needs of business,technological pressures,technology and functional level efficiency & effectiveness.

(vi) Aesthetic: communication, marketing & promotion,image,fashion,organisational,public relations.

(vii) Customer: needs & wants,customer care,anticipating,future requirements,consumer behaviour.

(viii)Legal: Legal pressures,product liability,employment law,competition legislation

SPECTACLES Analysis

(ix)Environmental: responsibities to the planet,responsbilities to communities,pollution & other environmental imperatives.

(x)Sectoral:Competition,market structures,competitive forces,co-operation,differentiation & market segmentation

SPECTACLES Analysis

For those responsible for strategic management & direction of organizations, the SPECTACLES approach generates a broadness of considerations that, in many cases, is not present at all.

The key benefit of SPECTACLES approach is to ensure that every aspect of the business & environment is addressed.

It requires that even the softer aspects of the org like culture & aesthetics are considered.

It makes managers think more deeply about every issue & constrain

Competitor Analysis

*Competitor Analysis Frameworki) Competitor Identification; The starting point in

competitor analysis is identifying existing as well as potential competitors

(ii) Competitor Assumptions;The assumptions that a competitor`s managers hold about their firm & their industry help define the moves they are likely to make

(iii) Competitor Objectives; Knowledge of a competitor objectives facilitates a better prediction of the `s competitor`s reaction to different competitive moves

Competitor Analysis

(iv) Competitor Strategies; Knowledge of the competitor`s strategy ensures that the firm will craft a strategy that aimed at outperforming competition

v) Competitor Capabilities; competitor capabilities can be analysed according to its strengths & weaknesses in functional areas

Strategic Group Analysis

• A strategic group is a group of firms following the same strategy in a given target market.

• The firm’s in a strategic group provide direct competition to each other.

• A firm must thus always monitor the activities of those competitors in its strategic group more closely than those outside the group.

• Strategic groups are identified by the key competitive variables in that industry

Porter `s Five Forces Model

Porter's five forces of competitive position analysis was developed in 1979 by Michael E. Porter of Harvard Business School as a simple framework for assessing and evaluating the competitive strength and position of a business organisation. This theory is based on the concept that there are five forces which determine the competitive intensity and attractiveness of a market. Porter’s five forces helps to identify where power lies in a business situation. This is useful both in understanding the strength of an organisation’s current competitive position, and the strength of a position that an organisation may look to move into.

P0rter `s five forces Model

Threats of New Entrants

Bargaining Power

of Suppliers

Competitive Rivarly

Bargaining Power of

Buyers

Threats of New

Substitutes

Porter’s 5 forces Model

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Porter identified that high or low industry profits are associated with the following characteristics:

High industry profits are associated with;

Weak SuppliersWeak Buyers

High Entry barriersLittle rivarly

Few opportunities for substitutes

Low industry profits are associated with;

Strong SuppliersStrong Buyers

Low Entry barriersIntense rivarly

Many opportunities for substitutes

Threats of New Entrants

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Profitable markets attract new entrants, which erodes profitability.

Unless incumbents have strong and durable barriers to entry, for example, patents, economies of scale, capital requirements or government policies, then profitability will decline to a competitive rate.

If barriers to entry are low then the threat of new entrants will be high, and vice versa

Bargaining Power of Suppliers

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If a firm’s suppliers have bargaining power they will: Exercise that power Sell their products at a higher priceSqueeze industry profits*Bargaining power of suppliers depends on(i) Uniqueness of the input supplied(ii) The relative size & strength of the supplier(iii) The number of suppliers for each essential input (iv) Competition for the input from other industries (v) Cost of switching to alternative sources

Bargaining Power of Buyers

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Powerful customers are able to exert pressure to

drive down prices, or increase the required quality

for the same price, and therefore reduce profits in an

industry.Several factors determine the bargaining

power of customers, including:

(i)Number of customers /buyers in the market

(ii)Their size of their orders

(iii)Number of firms supplying the product

(iv)The threat of integrating backwards

(v)The cost of switching from one supplier to another

Threat of Substitute Products

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A substitute product can be regarded as something that meets the same need

If there are many credible substitutes to a firm’s product, they will limit the price that can be charged and will reduce industry profits.

Degree of Competitive Rivarly

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If there is intense rivalry in an industry, it will encourage businesses to engage in

Price wars (competitive price reductions),Investment in innovation & new productsIntensive promotion (sales promotion and

higher spending on advertising)

All these activities are likely to increase costs

and lower profits.

Sixth Force ? (Power of Complementors)

*The sixth force, “The Power of Complementors’’ was added by Brandenburger & Nalebuff (1996) who identified the power of affect the usage & sales of PC market players like IBM,DELL & HP-Complementors are not found in every industry & reseaerchers only noticed them when they were studying new industries like software.-Complementors do not complete in the industry ,do not supply it or buy from it.-Porter (2001) disputes the power of complementors to directly affect the profitability of an industry-in his fiew its not a true force.

Porter `s Four Corner Analysis Model

*Developed by Michael Porter, the four corner’s analysis is a useful tool for analysing competitors.

It emphasises that the objective of competitive analysis should always be on generating insights into the future.

Porter `s Four Corner Analysis Model

Summary of Porter's Four Corner's Analysis Model

a) Motivation – drivers: Analysing a competitor’s goals assists in understanding whether they are satisfied with their current performance and market position.

This helps predict how they might react to external forces and how likely it is that they will change strategy.

b) Motivation – Management Assumptions: The perceptions and assumptions that a competitor has about its business, the industry and other companies will influence its strategic decisions.

Summary of Porter's Four Corner's Analysis

c) Actions – Strategy: A company’s strategy determines how it competes in the market.

Where the current strategy is yielding satisfactory results, it is reasonable to assume that an org will continue to compete in the same way as it currently does.

d) Actions – capabilities. The drivers, assumptions and strategy of an organisation will determine the nature, likelihood and timing its actions.

However, an org ’s capabilities will determine its ability to initiate or respond to external forces.

Concept of Competitive Advantage

*An organization a achieves competitive advantage when it offers disproportionately higher net benefits to customers relative to competitive. Having achieved competitive advantage means that the org has been able out-peform competitors in one

or more ways.Org would have deviated from parity in terms of industry performance.Ideally competitive advantage should be sustainable

Sources of Competitive Advantage

a) Resourcesb) Corporate Culturec) Technological know-howd) Market Powere) Relationshipsf) Size of the organization.

“STRATEGIC PARTNERSHIPS HAVE BECOME CENTRAL TO COMPETITIVE SUCCESS IN FAST CHANGING MARKETS”

*STRATEGIC ALLIANCES*OUTSOURCING

COLLABORATIVE AND COOPERATIVE STRATEGIES

What is Collaboration

*“Collaborative management is a concept that describes the process of facilitating and operating in multi-organizational arrangements to solve problems that cannot be solved, or solved easily, by single organizations. (Agronoff & McGuire 2002)*Collaborative arrangements include:Policymaking and strategy making e.g Engaging in formal partnerships & joint policy makingResource exchangeProject-based work

Types of Collaborative Arrangements

a) Strategic Alliancesb) Outsourcing

(a) Strategic Alliances

*A partnership of two or more corporations or business units to achieve strategically significant objectives which are mutually beneficial.*Any cooperative effort between two or more organisations to develop, manufacture and/or market products and services.

Three TypesOf

Alliances

NonequityAlliance

Contracts

• licensing• supply &

distributionagreements

JointVenture

EquityAlliance

Cross EquityHoldings• partners own

stakes ineachother

Joint EquityHoldings• independent

firm iscreated

Reasons for Forming Strategic Alliances

Generate economies of scale Gain access to strategic markets Overcome trade barriers such as import barriers To share costs and risks of R&D Gain access to a needed technology Use excess capacity Gain access to low-cost manufacturing capabilities Access a name or customer relationship Reduce the investment required to enter a new

venture.

Guidelines for Alliance Success

Choose the right partnerReputation and Trust Mutual dependency ;- each party should

have something of value to gain from the alliance

Pre-nuptial Agreement;- Partners should work out a plan how to deal with proprietary technology and competitively sensitive information There should be no elephant and ant

complex among the partners

(b) Outsourcing

This involves withdrawing certain activities in the value chain system and relying on outside organisations to supply the needed activities, products and support services.Orgs outsource when:

An activity can be performed better or more cheaply by outside specialists.

An activity is not crucial to the org ’s ability to achieve a sustainable competitive advantage.

Outsourcing reduces the org’s risk exposure to changing technology

Outsourcing allows the org to concentrate on its core business and do what it does best.

Outsourcing Benefits & Risks

*Benefits Ability to concentrate on core business and core

competencies Obtaining higher quality and/or cheaper components

or services than can be done internally. Reduced capital investment

*Risks Loss of competitive knowledge in outsourced

activities Conflicting objectives with outsourcing

partner Danger of outsourcing the wrong types of

activities which impact on the org ’s capabilities.

Conclusion

Strategic alliances and outsourcing have become an important strategic tool of cooperation to enhance competitiveness.

Most important decisions: picking the right alliance or outsourcing partners

CORPORATE STRATEGY

STRATEGIC FORMULATION & CHOICE

What is Corporate Strategy?

*Determining the overall direction that will enable the org to best fulfill its purpose & achieve its strategic goals through:

(i)The org `s overall orientation towards growth,stability,retrenchment or combination (directional /grand strategies)

(i) Actions to boost combined performance of businesses through the manner in which mngt co-ordinates the activities & transfers resources & cultivates capabilities among SBUs (parenting strategy)

(ii) The industries or markets in which the firm competes through its SBUs, establishing investment priorities & steering corporate resources into most attractive units (portfolio strategy)

Possible Corporate (grand /directional ) strategies

(1) Growth: expansion of organizational activities.(2) Stability: keeping the organization where it is

in order to consolidate or maintain a firm`s competitive position

(3) Retrenchment: reversing the organization’s weaknesses or decline through reduction in product/service lines, markets or functions.

(4) Combination Strategy: a multi-strategy approach whereby there is justification for pursuing one strategy in some SBUs & another in the others

A. GROWTH as grand/directional strategy

Growth strategy Involves the attainment of specific growth

objectives by increasing the level of an firm’s operations

Typical growth objectives for businesses Increase in sales revenues Increase in earnings or profits Other performance measures

Growth objectives of not-for-profit businesses Increasing clients served or patrons attracted Broadening the geographic area Increasing programmes offered

Types of Growth Strategies

(prd-mkt/limited/intensive)

OrganizationalGrowth

Diversification•Related•Unrelated Horizontal

Integration

Vertical Integration•Backward•Forward

ConcentrationInternational

Concentration Strategy

A growth strategy where the firm Concentrates on its primary line of business Looks for ways to meet its growth objectives through

increasing its level of operation in this primary business.

*Through concentration growth is realized by way of: market penetration market development product development.

Market Penetration

*A growth strategy seeking to increase market share for present products or services in present markets through greater marketing efforts with two broad objectives:

To increase market share To retain existing customers.*Firm concentrates on doing better what it has been doing well such that its objectives are actualized

through: Increasing the consumption rate of existing users. Attracting new users to the product Getting competitor customers to switch to your

products.

Conditions favouring Market Penetration

When current markets are not saturated with a particular product or service.

When the usage rate of present customers could be increased significantly

When increased economies of scale provide major competitive advantages

Market Development

A concentration growth alternative where expansion is driven by introducing present products or services into new geographic areas. The new markets can be:

(ii) New geographical markets such as foreign countries, or

(ii) new market segments not currently using the product

Over the past 30 yrs,China has been an attractive target of many firms' mkt development initiatives especially those that deal in consumer goods & `kids related products.

Conditions favouring Market Development

When new channels of distribution are available that are reliable, inexpensive, and of good quality.

When new untapped or unsaturated markets exist.

When an org has the needed capital and human resources to manage expanded operations.

When an org has excess production capacity.

Product Development

*Growth is driven by increasing sales through the introduction of new products to existing markets. *Product development may involve altering

existing products by: (i) adding new features,(ii) offering different quality levels, or(iii) offering different sizes of the product Often linked to attempts to prolong the PLC Product development usually entails large R&D

expenditures

Conditions favouring Product Development

An org competes in a high-growth industry that is characterized by rapid technological developments.Major competitors offer better-quality products at comparable prices. When an org has especially strong research and development capabilities.

Diversification Strategies

A corporate growth strategy in which a firm expands its operations by moving into a different industry

Two major types of diversification Related (concentric) diversification Unrelated (conglomerate) diversification

Why Do Firms Diversify?

a) To achieve desirable levels of growthb) To more fully utilize existing resources and

capabilitiesc) Risk reduction and/or spreadingd) To make use of surplus cash flowse) To enhance shareholder value through

snergy.Synergy can be obtained in three ways Exploiting economies of scale Exploiting economies of scope Efficient allocation of capital through the use of

portfolio management techniques

Criteria for Effective Diversification

Diversification is capable of increasing shareholder value if it passes three tests: The attractiveness test: The industry must be

structurally attractive or capable of being made attractive

The cost-of-entry test: The cost of entry must not capitalize all future profits

The better-off test: Either the new unit must gain competitive advantage from its link with the corporation or vice versa (i.e. synergy)

Costs of Diversification

Ignorance(about newly

entered fields)

Ignorance(about newly

entered fields)

Neglect(of corebusiness)

Neglect(of corebusiness)

Coordination( Communication•Accountability)

Coordination( Communication•Accountability)

Balancing the Benefits & Costs of Diversification

Benefits • Costs

• More attractive terrain

• Access to key resources

• Sharing resources

• Ignorance

• Neglect

• Coordination

Limiting Diversification Costs

*Limit Costs of Ignorance by...

entering familiar fields

entering new areas internally rather than by acquisition

*Limit Costs of Neglect by...

ensuring new businesses fit easily with existing ones

leveraging a distinctive competence systemwide

*Limit Costs of Cooperation by…

carefully managing the sharing of activitiesdesigning organizational support systems that promote

that promote interrelationships

Diversification Strategies (options)(i) Related (Concentric) Diversification

Diversifying into a different industry but one that’s related in some ways to the org ’s current operations

The new products or services involved may have linkages with the current products either through marketing or technology.

Search for strategic “synergy”, which is the performance of the sum of the parts is better than the whole

Synergy happens because of the interactions and the interrelatedness of the combined operations and the sharing of resources, capabilities, & distinctive competencies

Builds shareholder value by capturing cross-business “strategic fits”

Diversification Strategies (options)

(ii) Unrelated DiversificationDiversifying into completely different industry from the firm’s current operations.No discernible relationship between existing and new products service or markets such that diversification is justified as a promising investment opportunity.Firm move into industries where there is

No strategic fit to be exploited No meaningful value chain relationships No unifying strategic theme

Approach is venture into any business with good profitability prospects

Intergrative (substantive) growth strategies

*Through mergers & acquistions firms are able to grow through vertical & horizontal intergration such that they gain control over distributors, suppliers, and/or competitors. A merger is a legal transaction in which two or

more organizations combine through an exchange of stock to create one bigger firm.

An acquisition is an outright purchase of an organization by another

VERTICAL & HORIZONTAL INTERGRATIONS

Shirt Manufacturer

Clothing Store Clothing Store

Shirt Manufacturer

Textile Producer Textile Producer

Green arrows reflect vertical intergration whereby firm grows by merging with or aqcuiring suppliers or intermediaries while purple arrows show growth by horizontal intergration (aquistions & mergers of competing businesses.

Vertical Intergration

*Firm grows either by acquiring firms that supply it with inputs (backward vertical intergration) or that distribute its products (forward vertical intergration) For example acquisition of a textile firm by a shirt

manufacturer is a classic reflection of backward vertical intergration & the aquistion of a clothing chain store by a the same shirt manufacturer which classically typify forward vertical intergration

Forward Intergration

* Forward integration entails growth gaining ownership or increased control over distributors or retailers.

*Conditions favouring forward intergration include:(i) An org ’s present distributors are especially

expensive, or unreliable, or incapable of meeting the firm’s distribution needs.

(ii) The availability of quality distributors is so limited as to offer a competitive advantage to those firms that integrate forward.

(iii) An org has the resources needed to manage the new business of distributing its own products.

(V) Present distributors or retailers have high profit margins

Backward Intergration

*Backward integration is a strategy of seeking ownership or increased control of a firm’s suppliers.*Conditions that favour backward intergration include:(i) An organization’s present suppliers are

especially expensive, or unreliable, or incapable of meeting the firm’s needs for parts, components, assemblies, or raw materials.

(ii) The number of suppliers is small and the number of

competitors is large

Backward Intergration

*Conditions that favour backward intergration include:(iii) An org the resources to manage the new

business of supplying its own raw materials.(iv) Advantages of stable prices are particularly

important.(v)Present suppliers have high profit margins(vi) An org needs to quickly acquire a needed

resource

Vertical Integration Continuum

*Harrigan (1989) postulated that a company `s degree

of vertical intergration can range from a total ownership of the value chain needed to sell a

product to no ownership at all.

Source: Harrigan K.R (1983),Strategies for Vertical Intergration,Rowan & Littlefield Publishing Group,page 16

Full Intergration

Taper Intergration

Quasi-Intergration

Long-term Contract


(i) Full Intergration: firm internally makes 100% of its key supplies & completely controls its distributors.

Large oil companies such as Royal Dutch Shell are fully integrated.

They own the oil rigs that pump oil out of the ground,the ships & pipelines that transport the oil,the refineries that convert the oil to petroleum and the trucks that deliver the petroleum to company owned & franchised gas stations.


(ii) Taper IntergrationA firm internally produces less than half of its

own requirements & buys the rest from outside

suppliers (backward taper integration) In terms of forward taper integration,a firm

may sell part of its products through company owned outlets & the rest through other intermediaries.


(iii) Quasi integration: a firm does not make any of its key supplies but purchases from outside suppliers that that are under its partial control (backward-quasi intergration)

• An example of forward-quasi intergration would be when a large pharmaceutical firm acquires part interest (through equity ownership) in a pharmacy chain (drug store) to guarantee that its drugs have access to distribution channel.


(iv) Long term contracts: Agreements between firms to provide certain supplies of goods or services to each for a specified period of time.

Long term contracts are considered vertical intergration if they is an exclusive contract.

In that case, the supplier or is really a captive company that, although officially independent, does most of its business with the contracted firm & is formally tied to the org through a long term contract.

International Growth options (Entry modes)

(a) Exporting: producing goods in one country & selling them in another directly/indirectly.

(b) Licensing: firm enters a foreign market segment through giving the right to another company to operate using its trademark, trade secret or any other similarly valued items of intellectual property to another company in return for a fee.

(c) Contract Manufacturing: company contracts a foreign firm to manufacture products according to its stated specifications

International Growth options contd

(d) Franchising: a more complete form of licensing which entails a contractual agreement between the franchisor & the franchisee allowing the franchisee to operate a foreign country based business (retail product or service firm/ or business to business provider) using the brand name & business model developed & supported by the franchisor.

(e) Joint Ventures: a firm entering a new foreign market pools resources with those of a local firm to form a new company in which ownership, control & profits are shared.

International Growth options contd

(f) Direct Investment: firm establishes wholly owned plants, operations facilities in a foreign country through establishing wholly owned subsidiaries.

Entry strategy requires highest level of financial commitment thus exposes firm to highest level of risk

B. STABILITY as grand/directional strategy

A strategy where the organization maintains its current size and current level of business operations without any significant change in direction.

Although it is inconceivable that an org that an org may stay where it is, there are times when its resources, capabilities & competencies are stretched to the limit such that expanding the org `s operations further might risk the org `s competitive advantage.

It is at times like these that managers might decide to maintain their activities & operations at a certain level.

When is stability an appropriate strategy?

Industry is in a period of rapid upheaval with several key industry & external forces drastically changing, making future highly uncertain

Industry is facing slow or no growth opportunities-strategic managers might opt for stability before making strategic moves into new industries.

Organization has just completed a frenzied period of growth & needs to have some “down” time in order for its resources & capabilities to build up strength again

For small business owners who have found a niche & are happy with their success & the manageable size of their firms.

Stability strategy options

(i) Pause/Proceed-with-Caution strategy This stability alternative reflects an opportunity

to rest before continuing a growth or retrenchment strategy.

Deliberate attempt to make incremental improvements until a particular environmental situation changes.

Typically conceived as a temporary strategy until the environment becomes more hospitable or to enable a company to consolidate its resources after prolonged rapid growth.


(ii) No change strategyIs a decision to do nothing new-a choice to

continue with current operations & policies for the foreseeable future.

Success of such a strategy depends on a lack of significant change in the firm `s environment.

Firms makes small adjustments for inflation in its sales & profit objectives.


(iii) Profit Strategy: is a strategic decision to do nothing new in a worsening but to act as though the company `s problems are temporary.

May manifest through the firm artificially supporting profits when a company `s sales are declining by reducing reducing investment & short term discretionary expenditures.

Blaming the company `s problems on a hostile environment mngt defers investment & or cuts expenses to stabilize profits during this period.

Conclusion: Stability as a Grand/Directional Strategy

A stability strategy is implemented through not expanding organization’s level of operation .

Stability should be a short-run strategy. Because industry & competitive positions

continue to change while an org stabilizes,its important for strategic managers to get the org `s resources,capabilities and core competencies aligned & strengthened once again so that it does not lose its competitive position.

C.Retrenchment as a grand/directional strategy

*Short-run strategy alternatives designed to address organizational weaknesses and deficiencies that are leading to performance decline through contraction of activities.

*Retrenchment is often triggered by: disappointing performance,economic downturn,excessive debt or ill-chosen acquisitions.

*In attempts to deal with weaknesses that are weighing down performance, mngt follow any of the following retrenchment strategies:

a) Turnaround strategy b) Captive Company Strategy

c) Sell-out/Divest d) Bankruptcy / Liquidation

a) Turnaround strategy

*Turnaround Strategies A retrenchment strategy alternative that focuses on

reversing declining sales and profit through cutting costs and selling assets for situations where the firm’s performance problems are more serious but not yet critical

Objective of turnaround strategies Improve operational efficiency Improve revenue and profitability of

underperforming businesses

Turnaround strategy

*Turnaround most appropriate when Reasons for poor performance are short-

term Divestment doesn't make long-term sense Firm has failed to meet its objectives and

goals consistently over time but has distinctive competencies

Where there is inefficiency, low profitability, poor employee morale, and pressure from stockholders to improve performance.

Phases of a turnaround strategy

Two basic phases of a turnaround strategyContraction – effort to quickly “stop the

bleeding” through general across the board cutback in size costs.

Consolidation – stabilizing the new leaner organization

b) Captive Company Strategy

Involves giving up independence in exchange for security.Mngt desperately searches for an “angel” by

offering to be a captive company to one of its larger customers in order to guarantee the company`s continued existence with a longer term contract.

In this way org may be able to reduce the scope of its functional activities such as marketing, thus significantly reduce costs.

Weaker company gains certainty of sales & production in return for being heavily dependant on another firm for at least 75% of its sales.

c) Sell-Out /Divestment Strategy

(i) Selling-Out : Selling off the entire operation to a buyer where it will continue as a going concern.

*Sell out makes sense if:-mngt can get a good price for its shareholders.-employees can keep their jobs by selling the entire company to another firm.-Acquiring company will have the necessary

determination & resources to return the company to

c) Sell-Out /Divestment Strategy

(ii) Divestment: corporation has multiple businesses & it chooses to sell off a division that is underperforming/has low growth potential.

*Divestiture makes strategic sense when: Firm has pursued turnaround strategy but failed to

attain needed improvements Division needs more resources than the firm can

provide Division is responsible for the firm’s overall poor

performance Division is a misfit with the org. A large amount of cash is needed to sustain the SBU

& cannot be obtained from other sources

d.Bankruptcy/Liquidation Strategy

• When a firm finds itself in the worst possible situation, with a poor competitive position in an industry with few propects,mngt has only a few alternatives all of which are distasteful i.e liquidation or bankruptcy.

• (i) Bankruptcy: A firm declares itself bankrupt for protection from creditors for a period of time to permit reorganization.

• Thus with bankruptcy, an org re-organizes its debts & is legally protected from creditors collecting their on their debts until such time it can emerge from bankruptcy

d.Bankruptcy/Liquidation Strategy

(ii)Liquidation: selling off a business for the cash value of the assets, thus terminating its existence

*The last resort…no one wants to buy the entire business.*The assets are worth more than the business…

so they’re sold piece by piece.*With liquidation, business ceases to exist (no

longer going concern).

D. Combination as a grand/directional strategy

Is a mixture (combination) of stability, growth & retrenchment strategies adopted by an org,either at the same time in its different businesses or at different times in the same businesses with the aim of improving its performance.

Reflects corporate planning being aimed at two or more goals such as growth, stability & streamlining simultaneously.

Combination is not an independent classification but is a mix of different strategies.

Circumstances favouring combination strategies

The org has multiple SBUs in different industries. When a single grand strategy does not fit all the

businesses at a particular point in time. Where its imperative to balance various

environmental & organizational factors

Creating value through Corporate Strategy

Reducing RiskMaintaining growthBalancing Cash FlowsSharing InfrastructureIncreasing Market powerCapitalizing on core competence

Portfolio Strategy

A business portfolio is the collection of businesses & products that make up the company.

The best business portfolio is the one that best fits the company`s strengths and weaknesses to opportunities in the environment.

In relation to business portfolio planning, the company must; Analyze its current business portfolio and decide

which businesses should receive more, less or no investment, and

Develop growth strategies for adding new products or businesses to the portfolio

STEPS IN BUSINESS PORTFOLIO PLANNING

(i) 1.Identification of key business units.Management `s first step is to identify key business units that make up the Company. These are called Strategic Business Units.An SBU is a separately managed division or unit of an enterprise with strategic objectives that is both distinct from the parent unit and integral to the overall performance of the enterprise e.g Powerfm, Spot fm,Radio Zimbabwe, National Fm and ZTV are SBUs of Zimbabwe Broadcasting Holdings Limited

2. Assessing relative attractiveness of SBUs

Most standard portfolio analysis tools evaluate SBUs on two important dimensions: the attractiveness of the SBU `s market/industry & the strength of the SBU `s position in that market or industry.

The best known of these portfolio planning methods is the BCG matrix as well as the Business Screen (General Electric Matrix as well as the Pioneer-Settler-Migrator Map (PMS Map)

The BCG Matrix

The BCG MatrixA way to determine whether a business unit is a

cash producer or a cash userThe BCG Matrix classifies SBUs according to two

dimensions ie market growth rate and market share.On the vertical axis, market growth rate provides a

measure of industry attractiveness.On the horizontal axis, market share serves as a

measure of company strength in the market such that four types of SBUs (Stars, Cash Cows, Dogs and Question Marks) can be identified.

The BCG Matrix

Dogs

A dog holds a low market share in an unattractive, low growth market.

It is likely to be making a loss or a low profit or just breaking even.

*Strategy options for ‘Dogs’a)Divest: Exit the business in order to use the

resources elsewhere.b)Maintain: keep the dog has an important role it is

playing and its future prospects are brightc)Reposition: reposition it into narrower market

segment

Question MarksAre low share business units in high growth

markets. They consume resources (as you attempt to

increase share) and generate little in return. The high growth rate of a question mark is a

good thing but the low share is worrying.• Strategic options for “Question Marks”a)Build Share: here the company can invest to

increase market shareb)Divest: from question marks lacking long-term potential

Stars

These SBUs that are in high growth markets with a relatively high share of that market

Often they need heavy investment to finance their growth & sustain business unit's market leadership position

Eventually the growth rate of their market will slow and, assuming they maintain their relative market share, will become cash cow

*Strategic Options for ‘Stars’Fortify & defend market position in the industry

up to the time when market growth rate slows down.

Cash Cows

Cash cows are relatively high market share businesses operating in low growth market.

They generate cash surpluses over & above what is needed to sustain its present market position.

These are mature, successful businesses with relatively little need for investment

*Strategic options for Cash CowsHold : Fortify & defend present market

position i.e here the company invests adequately to keep the SBU in its present position.

BCG Matrix: Implications/Advantages

It is quantifiable and easy to use. Easy to remember terms and their

meaning when referring to business units Assumes large market shares =>

economies of scale => cost leadership Each business unit moves across the

matrix in predictable ways over time Focuses attention on cash flows and needs

Limitations of BCG Matrix

Assumes that the major source of financing is internal. The main problem is that it oversimplifies a complex set of decisions There is an assumption that higher rates of profit are

directly related to high rates of market share High market growth is not the only indicator of industry

or market attractiveness High market share is not the only measure of strength Premised on the assumption that SBUs fit into polar

extremes measures of high & low for relative market share & market growth.

A SBU classified as a dog may still be profitable for yrs even though it never gains market share.

There is another assumption that SBUs will cooperate.

The General Electric (GE) Matrix

The limitations of the BCG portfolio led to the development of other approaches (such as the GE Matrix) to the same set of strategic questions.

General Electric Matrix

*The GE model emphasises all all potential sources of strength,not just market share,and all the factors that influence long term attractiveness of an industry/market,not just its growth rate.


*According to Laudon et al (2005): Industry attractiveness is determined by market

growth plus market size, pricing flexibility ,competitive structure, profitability, technology role, social environment, legal imperatives etc.

Business strength is determined market share plus company size, and growth rate, brand position, profitability margins, technology position, product quality, image, etc.


The different colour quadrant areas each represent different combinations of industry attractiveness & company strength/position.

The “red and purple” zone represents SBUs of low to medium industry attractiveness & average to weak business strength/position (Losers). These are prime candidates for divestment or liquidation unless a turnaround strategy is employed.

The “blue” zone consists of the three diagonal cells stretching frm the lower left to the upper right. These SBUS (Profit Producers,Average Businesses & Question Marks) warrant only a medium investment allocation & the strategy is usually hold & maintain.

The “green & yellow” zone represents SBUs (Winners) that are in the most attractive industries where the company has relatively favourable strength/position. These SBUs are in the highest investment priority & the strategy for these SBUs is “grow & build.”

General Electric Matrix: StrengthsAllows for more classifications of SBUs through the nine cell

approach allows for intermediate rankings between high/low and strong/weak

It also involves analysis of many factors to evaluate business strength and industry attractiveness and not just market share and industry growth rates.

The detail and richness of this type of analysis provide a more in-depth perspective of an SBU’s current position.

Stresses channeling of resources to areas with the greatest probability of achieving competitive advantage and superior performance

General Electric Matrix: Weaknesses

Considerably more time and effort is needed to collect the data and rank each business using the GE approach

There may be trade-offs between some factors e.g brand image & market share

The Pioneer – Migrator – Settler Map

Red Ocean based portfolio-planning has its own impressive array of tools that include the widely popular Boston Matrix, the General Electric Matrix among others.

To aid in the navigation of Blue Oceans, Kim and Mauborgne (2005) came up with Pioneer - Migrator - Settler Map as the Blue Ocean Strategy based equivalent.

Settlers

Me-too businesses which will not generally contribute much to a company’s future growth.

If both the current portfolio and the planned offerings consist mainly of settlers, the company has a low growth potential, is largely confined to red oceans, and needs to push for value innovation.

Although the company might be profitable today as its settlers are still making money, it may well have fallen into the trap of competitive benchmarking, imitation, and intense price competition

Migrators

Migrators offer improved value, but not innovative value.

These are businesses whose strategies fall on the margin between red oceans and blue oceans.

If current and planned offerings consist of a lot of migrators, reasonable growth can be expected.

However,the company is not exploiting its potential for growth, and it risks being marginalized by a company that value-innovates.

Pioneers

Are the businesses that offer unprecedented value.

These are your blue oceans which are the most powerful sources of profitable growth.

Pioneers have a mass following of customers.Pioneers have maximum growth potential but often consume cash at the outset as they

grow and expand

Conclusion: PMS Map

The PMS map shown above depicts this org ’s portfolio of businesses, where the gravity of its current portfolio of 12 businesses, expressed as 12 dots,shifts from a preponderance of settlers to a stronger balance of migrators and pioneers.

In pushing their businesses toward pioneers, however, senior executives should be well aware that even though settlers have marginal growth potential, they are frequently today’s cash generators.

On the other hand, pioneers have maximum growth potential but often consume cash at the outset as they grow and expand. Thus,senior managers’ goal here should be to manage their portfolio of businesses to wisely balance between profitable growth and cash flow at a given point in time.

Corporate Parenting Strategy

Relates to corporate value creation through managing resources & capabilities in a way that creates & maximises synergistic relationships across the SBUs.

CP strategy focuses on core competencies of the parent corporation & on the value created from the r/shp btwn the parent & SBUs.

If there is a good fit between the parent `s skills & resources & the needs & opportunities of the SBUs,the corporation is likely to create value.

Research shows that SBUs with a good fit between their strategy & parental support & guidance are better performers than those without good fit.

Developing a corporate parenting strategy

(i) Examine each SBU (or target firm, in case of acquisition) in terms of its strategic factors.

(ii) Examine each SBU (or target firm) in terms of areas in which performance can be improved.

(iii) Analyze how well the parent corporation fits with the SBU or target firm e.g its own strengths & weaknesses in terms of resources,skills & capabilities.

STRATEGIC FORMULATION & CHOICE

BUSINESS LEVEL/ COMPETITIVE STRATEGY

BUSINESS LEVEL/ COMPETITIVETRATEGY

– Focuses on improving the competitive position of a company or business unit within the specific industry or market segment it serves.

– While corporate strategy ask what industry (ies) the company should be in, business strategy asks how the company or its units should compete or co-operate in each industry.

– Business level strategy options include:a) Porter (1980) `s generic competitive strategies.b) Intergrated low cost & differentiation (combination

strategies) e.g Blue Ocean Strategyc) Miles & Snow `s Adaptive Strategiesd) Mintzberg `s Generic competitive Strategies

(A) Porter’s Generic Competitive Strategies

Porter (1980) came up with 3 generic strategies which the scholar posited as effective pursuant to coping with competitive forces & driving competiveness in given markets:I. Overall cost leadershipII.DifferentiationIII.Focus

Porter’s Generic Competitive Strategies

Porter’s Generic Competitive Strategies

Combination of the competitive advantage used and the strategic target results in the three generic competitive strategies as follows:

I. Cost leadership strategy ;-firm strives to have the lowest costs in its industry and produces products /services for a broad customer base.

II.Differentiation Strategy ;-firm competes on the basis of providing unique (different) products /services with features that a broader group of customers value, perceive as different, and are willing to pay a premium price for.

III.Focus strategy ;-can be cost focus or differentiation focus. Focus (cost): concentrating on a narrow customer segment and

outcompeting rivals by serving the niche customers at a lower cost than competitors

Focused (differentiation ) ;- concentrating on a narrow buyer segment and outcompeting rivals by offering the niche customers customised attributes that meet their requirements better than competitor products

(i) Cost Leadership Strategy

*Requirements for Cost Leadership (Internal) Commonly required Skills and Resources

Sustained capital investment Access to cheap sources of capital Process engineering skills Low cost distribution system

Common organizational requirements Tight cost control Frequent detailed control reports Incentives based on meeting strict quantitative targets

Cost Leadership Strategy Works Best where

Price competition among rival producers is very intense.

Product is standardised or readily available from rivals

There are few ways to achieve differentiation that has value to customers

(ii) Differentiation Strategy

Requirements for Differentiation (Internal) Commonly Required Skills and Resources

Strong marketing abilities and reputation in the industry Creative flair Strong R&D capabilities Corporate reputation for quality and technological leadership

Common Organizational Requirements Ability to develop product features that raise performance of

the product Ability to deliver value via competitive abilities competitors

cannot match Strong coordination and collaboration among the functions Ways to attract highly skilled labour and creative people Incentives based on qualitaive and not quantitative measures

Differentiation Strategy Works Best where

• Differentiation of a product can command a premium price which is higher than the cost of differentiation.

• There are many ways to differentiate the product that have value and please the customer

• Few rivals are following a similar differentiation approach

Focused (Market Niche) Strategies

• Is based on the choice of a narrow competitive scope within an industry– Firm selects a segment or group of segments

(niche) and tailors its strategy to serve them.– Firm achieves competitive advantages by

dedicating itself to these segments exclusively.• Two variants

– Cost focus: Strives to create a cost advantage in its target segment

– Differentiation focus: Seeks uniqueness in target market

– Both rely on providing better service than broad-based competitors who are trying to serve the focuser’s target segment

Focusing is Attractive when:The target market niche is big enough to be

profitable and offers good growth potentialIndustry leaders do not view the niche as crucial

to their own successIt is costly or difficult for multi-segment

competitors to put capabilities in place to meet the specialised needs of the niche and at the same time serve their main stream customers.

The focuser has the capabilities and resources as well as goodwill it may have built up to compete against challengers trying to enter the niche.

Conclusion on Generic Strategies

Discussion point – Discuss how companies in Zimbabwe are employing Porter (1980)`s generic strategies to outperform competition

B.Integrated low cost & differentiation (combination strategies)

Primary benefit of successful integration of low-cost and differentiation strategies is difficulty it poses for competitors to duplicate or imitate strategy

Goal of combination strategy is to provide unique value in an efficient manner

Blue Ocean Strategy is one of the most popular combination strategy alternatives

Blue Ocean Strategy

Blue Ocean Strategy, as conceptualised by Kim and Mauborgne (2005) is a strategic framework whereby a business focuses on creating new demand, directing its strategic compass on uncontested market space, making competition irrelevant thus realising disproportionately high growth and profitability.

A red ocean is a market space characterised by intense competition and is analogous to blood-stained, shark infested waters

Blue Ocean vs Red Ocean Strategy

Value Innovation: cornerstone of Blue Ocean Strategy

Creation of an unparalleled leap in value for buyers and their company

through simultaneous achievement of low cost & differentiation in an

offering.

Value Innovation: cornerstone of Blue Ocean Strategy

Questions that guide value innovation

Six Principles of Blue Ocean Strategy

Reconstruct market boundaries

Focus on the big picture, not the numbers

Reach beyond existing demand

Get the strategic sequence right

Overcome key organizational hurdles

Build execution into strategy

Six Misconceptions about Blue Ocean Strategy

Misconception 1: Blue Ocean is about new products, new technologies or diversification beyond a company’s core business.

Misconception 2: Blue Ocean Strategy is a cowardly approach as it asks companies to evade the competition.

Misconception 3: Blue Ocean Strategy is a customer-oriented strategy

Six Misconceptions about Blue Ocean Strategy

Misconception 4: Blue Ocean is only wishful thinking, as any blue ocean created usually turns red rapidly.

Misconception 5: Blue Ocean Strategy is like an old wine in a new bottle, as it is just a modified version of differentiation strategy.

Misconception 6: Blue Ocean Strategy does not fit the needs of Zimbabwean companies

Strengths of a Blue Ocean Strategy based business model

Sustainable profitability Inbuilt barriers to entry Disproving entrenched economic theory through

achieving low cost and differentiation simultaneously Absence of price wars that are associated with crowded

market places. Based on a unique but clear methodology and a

refreshing set of analytical tools Based on a refreshing and game changing approach to

business Higher profits on the backdrop of low costs Encouraging creativity and innovativeness in an

organisation Unique business model that cannot be created by other

companies and that competitors cannot make sense of

Weaknesses of a Blue Ocean Strategy based business model

Risky as it may push companies to pursue new things while jettisoning their competencies indiscriminately

Commercial success may be unsustainable as competitors, attracted by supernormal profits, will enter the industry and turn the blue ocean (red) bloody

Not easy to achieve low cost and differentiation simultaneously

Applicability of Blue Ocean Strategy in Zimbabwe

Viable in ZimbabweSustainable in ZimbabweBlue Ocean based business model has more

strengths than weaknesses There are current or possible blue oceans in

ZimbabweZimbabwean Companies are able to achieve

differentiation and low cost simultaneously.

Blue Ocean Strategy is the future of strategy

C.MILES & SNOW `s ADAPTIVE STRATEGIES

Miles and Snow's adaptive strategies approach

is based on the strategies that organizations use to successfully adapt to their uncertain competitive environment. They identify four

strategic postures: i. Prospector strategyii.Defender strategyiii. Analyser strategyiv.Reactor strategy

Prospector strategy

*Org continually innovates by finding & exploiting new product and market opportunities.

A prospector `s competitive strength is its ability to survey rapidly changing environmental conditions to create new products & services to fit this dynamic environment.

Prosepector competitive strategy is to continously innovate,develop and test new products thus creating uncertainity for competition-who never know what going to happen & what to expect from the prospector.

Thus prospectors are constantly on the lookout (prospecting) for new directions to pursue & if the develop new products the market desires & is willing to pay for,the will have a sustainable competive advantage.

Defender Strategy

Characterized by continuous search for market stability & producing only a limited product line for a narrow segment of total potential market.

Seeks to protect (defend) its well-established business by doing whatever is necessary to aggressively prevent competitors from entering their turf e.g through vigorously protecting its product lines & market share by providing outstanding customer service & aggressively matching price cuts.Can carve out and maintain niches within its industry that find difficult to penetrate

Analyzer Strategy

* Strategy of analysis and imitationThoroughly analyzes new business ideas (products,

services, markets) before deciding to jump inWatches for and copies the promising and successful

ideas of prospectors

Reactor Strategy

Characterised by lack of coherent strategic plan or apparent means of competiting

Reactors simply respond to environmental changes & make strategic adjustments only when finally forced to do so by environmental pressures.

Unable to respond quickly to environmental changes because resources- capabilities are lacking or are not developed or exploited properly

D.Mintzberg’s Generic Competitive Strategies

*Henry Mintzberg developed an alternative typology of 6 (six) competitive strategies that the scholar felt reflected the increasing complexity of the environment as follows:

Differentiation

Undifferentiated

By Price

By Marketing Image

By Product Design

By Product Quality

By Product Support

Mintzberg’s Generic Competitive Strategies

(i) Differentiation by price: is a modification of Porter `s cost leadership strategy whereby Mintzberg argued that having lowest costs didnt provide a competitive advantage by itself but that advantage came from allowing the org to charge below market average prices.

(ii) Differentiation by image: competitive strategy in which org relies on creating a certain image in customer`s mind.

(iii)Differentiation by design: competing on the basis of providing desirable features & design configurations.

Mintzberg’s Generic Competitive Strategies

(iv) Differentiation by product quality: superior quality products drives an org `s

competitiveness.(v) Differentiation by product support:

competitive advantage sought through providing an all encompassing bundle of desired customer support services.

(vi) Undifferentiated Strategy: org has no basis for strategy or when it follows a copy cat strategy.

STRATEGY FORMULATION & CHOICE

FUNCTIONAL (OPERATIONAL) LEVEL STRATEGY

Functional (operational) Level Strategy

Is the approach of a functional area takes to achieve corporate & business unit objectives & strategies by maximising resource productivity.

Is concerned with nuturing a functional capability to provide a firm with a sustainable comppetitive advantage.

Functional Level Strategies.

(i) Marketing strategies: focuses on creation & improvements in prdt mix,pricing,promotion & distribution of the products.

(ii) Financial Strategy: examines the financial implications of corporate & business level strategic decisions & identifies the best possible course of action.

-aims to provide competitive advantage through lower cost of funds & attempts to maximize the value of the firm.

Functional Level Strategies

(iii) Research & Development Strategy: deals with product innovation & process innovation & improvement.

(iv) Operations Strategy: relates to transformational processes in which inputs are converted in outputs of value through: capacity decisions,location decisions,layout decisions,production decisions etc

(v) Purchasing Strategy: deals with obtaining raw materials ,parts,supplies needed to perform operations function as well as support other functions

Functional Level Strategies

(vii) Human Resources Strategy: the firm approach to people management encompassing reward mngt,recruitment & selection,perfomance management,training & development,employment relations etc

(vii) Information Technology Strategy: using I.T to provide business units with competitive advantage through robust information systems & technological applications

End of Course

Thank you for your support & making these course

what it is!May the good Lord richly bless u & wish you the

best beyond Strategic Management 1

strategic management 1 notes nust zimbabwe

Business

classification of strategy

intended strategy

growth strategy

folddefinitionii strategy

stability strategy

focus strategy

highlight strategy

typologydelineates strategy