the scenario: low cost through economies of scale techniques used include jit, tqm, kanban...
TRANSCRIPT
The Scenario:
Low Cost through Economies of Scale
Techniques used include JIT, TQM, Kanban
Innovative Approach Competitive Pricing
Dynamic Environment
Focus on building Core
Competencies
The Concept of Strategy:
Strategic Management involves creating organizations that generate value in a turbulent
world over a sustained period of time.
• Leadership• Creativity• Passion• Analysis• Build an organization that generates and respond to change
Task involves:
Hierarchy of Strategic Intent:
• Refers to the purposes the organization strives to achieve• Can be broad:
* Vision* Mission
• Can be more focused:
* Goals * Objectives
Vision:
• Refers to the category of intentions that are broad, all - inclusive and forward thinking
• Describes the aspirations of for the future, without specifying the means that will be used to achieve the desired ends
• Are personal things and often unwritten
• Example: Statement such as “Quality comes First”
But no company can afford to stop production if quality is bad since quality improvement is a continuous and gradually process
Mission:
• Refers to a statement that makes vision more tangible
• Verbalizes the beliefs and directions towards which a manager wants to lead the organization
• Addresses issues that are explicit and serve to identify what is unique about the character of the organization
• No well established rules regarding what they must include
Attempts to answer the following questions:
a. What is our reason for being? What is our basic purpose?
b. What is unique or distinctive about our organization?
c. What is likely to be different about our business three or five years in the future?
d. Who are, or who should be, our principal customers, clients or key market segments?
e. What are our principal goods and services, present and future?f. What are our principal concerns?
g. What are the firm’s basic beliefs, values, aspirations and philosophical priorities?
Examples of Mission Statements:
FORD MOTOR COMPANY
Ford Motor Company is a worldwide leader in automotive
and automotive-related products and services as well as newer industries such as aerospace,
communications and financial products.
Our mission is to improve continually our products and services
to meet our customers’ needs, allowing us to prosper as a business and to provide a reasonable return for
our stockholders, the owners of our business.
Source: Strategic Management – Miller and Dess, Second International Edition, McGraw Hill Companies
Examples…
AMERICAN AIRLINES
We will be the global market leader in air transportation and related information services.
That leadership will be attained by:
• Setting the industry standard for safety and security• Providing world-class customer service • Creating an open and participative work environment which seeks positive changes, rewards innovation and provides growth, security and opportunity to all employees • Provide consistently superior financial returns for shareholdersSource: Strategic Management – Miller and Dess, Second International Edition, McGraw Hill Companies
Goals:
• Refers to attempts made to make mission statements more concrete • Goals are needed as mission statements hardly project
concrete directions for action
• Address both financial and non – financial issuesFinancial:
BOEING: Profitability as measured against our ability to achieve and then maintain a 20 % average
annual return on Stockholder’s return.
REYNOLDS: To be an industry leader in profitability and growthand achieve an average ROE of 20
%.
Non - Financial:
BOEING: Integrity must pervade
our actions in all relationships,
including those with our customers,
suppliers and each other. This is a
commitment to uncompromising
values and conduct.
GE: We will run only businesses
that are number one or number
two in their global markets.
• Facilitate reasoned trade-offs
Example:
a. Having simultaneous goals like low cost leadership and good employee
b. During Recession may face a dilemma such as retaining employees or laying – off employees; one results in a loss and the other affects employee relations
Goals:
• Can be reached with a stretch
In the words of Edwin Land, founder of Polaroid:
Goals that draw the greatest strengths out of people are those they feel are manifestly
important and nearly impossible. By constantly setting goals that demand
more effort, an organization is more likely to reach its
fullest potential.
Goals:
• Cut across functional areas: integrating force
Goals:
• Based on following areas:
* Market Share and Brand Equity* Productivity* Profit Projection* HRD* Innovation* Resource Planning* Good Corporate Citizenship
Objectives:
• Are operational definition of goals
• Define what will be accomplished in order to reach the goals
• Characteristics include:
* Can be measured
* Incorporate the dimension of time
* Reduce Conflict
Forms of Strategy:
1. Intended Strategies
• Represent the plans that managers develop
• Provide guidelines for the means by which the organization will work toward the ends it pursues• Example AT & T’s Intended Strategy: • We are dedicated to being the world’s best at bringing people together – giving them access to each other and to the information and services they want and need – anytime, anywhere.
• We look at Customer satisfaction, employee satisfaction, Stock Price and EVA.
• We treat every one with respect and dignity, valuing individual and cultural differences
Categories of Guidelines:
• Help in linking the organization to the intentions/goals that are supposed to be reached.
Example: AT & T’s plans state that in order to reach its objective of 10
% growth in earnings annually, its business units will focus on high-margin products.
(A) Plans:
(ii) Other Examples:• To maintain our desired rate of growth, we will open four new stores in the next two years• To increase demand for our products, we will spend heavily on advertising to establish brand recognition.
• Timing is a critical element of plans
Categories of Guidelines:
• Guidelines explicitly stated or implicitly understood to be part of the intended strategy
Example:
• We will not depend on outside suppliers for the most critical
components for the assembly of our products.
(A) Policies :
• We will not take on long-term debt
• Usually stated in negative terms
• We will fund future growth through retained earnings
Realized Strategies:
• Entails reference to the past and to what has actually developed
• Realized Strategy different from Intended Strategy as the latter seldom survives implementation in its original form
• Plans that do not materialize are Unrealized Elements
Example:
* A firm plans to develop a new product and diversify into new markets. THIS IS INTENDED STARTEGY* The product is developed and successfully sold. THIS IS REALIZED STRATEGY.* Else the product is developed but fails to sell. THIS IS UNREALIZED STARTEGY.
Views of the Strategic Management Process:
Description Attempts to move an organization to a new strategic position and maintain that position as
efficiently and directly as possible
Assumption Organizational Strategy lends itself to intellectual analysis and formulation, the
environment is predictable and organizations are controllable
Benefits Has led to the development of many useful planning tools and techniques
Limitations Plans must be quickly outdated by unexpected developments; formal planning often breaks
down in implementation stage
RATIONAL PLANNING:
Mnemonic Icon Devise the shortest path
Views of the Strategic Management Process:
Mnemonic Icon
Search for what works
Description Typically move to new strategic positions and maintain those positions by making continuous
adjustments
Assumption While there will be many mistakes, organizations can benefit from them by discovering new ways of
moving towards the goals.
Benefits Emphasizes broad – based involvement in management of the firm and encourages risk
taking by legitimizing mistakes
ORGANIZATIONAL LEARNING:
Limitations May be stressful for individuals not used to unlearning the status quo and learning new ways of
managing.
Views of the Strategic Management Process:
Mnemonic Icon
Wander about
Description Organizational drift, from one strategy to the next, depending on the unfolding of events
beyond managers control
Assumption Managers lack the ability to forecast or enforce the developments essential to developing a pre-ordained strategy and therefore must continually
adjust.
Benefits Encourages flexibility and concern of strategy implementation
INCREMENTALISM:
Limitations Does not encourage proactive efforts to control the organization’s future or destiny.
Views of the Strategic Management Process:
Description Organizational drift, from one strategy to the next, depending on the unfolding of events
beyond managers control
Assumption Managers lack the ability to forecast or enforce the developments essential to developing a pre-ordained strategy and therefore must continually
adjust. Benefits Encourages flexibility and concern of strategy implementation
INCREMENTALISM:
Limitations Does not encourage proactive efforts to control the organization’s future or destiny.
Mnemonic Icon
Search for what works
Strategic Planning Process:
LEVELStrategic Context
Understanding and
Adjusting to Gaps
Identifying Resources needed to close Gap
Distributing Resources
Monitoring Progress
Corporate
Strategic GoalsVision
MissionObjectives
Business
Competitive Environmen
t Opportunities and Threats
Function
Internal SituationStrengths
and Weaknesses
1
2
3
4
5
6
7
8
9
10
11
12
Steps in Strategic Management Process:
• Evaluate performance in light off goals and identify gaps• Relate gaps to environmental conditions• Relate gaps to organizational capabilities• Identify future goals given understanding of gaps• Describe broad action plans aimed at meeting goals• Identify resources required by each function to implement
plans• Aggregate needs by function into overall needs of
business • Allocate resources across multiple business units• Reallocate resources across multiple functions• Deploy resources within functions• Monitor use of resources within functions• Monitor use of resources across businesses
Strategic Management vs. General Management .
• Integrates various management functions
• Oriented toward achieving organizational goals
• Considers broad range of stakeholders
• Entails multiple time horizons
• Concerned with both efficiency and effectiveness
Strategic Management Plan
Gaining Competitive Advantage through:
* Differentiation* Cost Leadership* Quick Response* Market Focus* Market Life Cycle
Strategic Management Plan
Addressing Financial Performance through:
* Economic Value Addition* Profitability* Growth* Managing Financial Risk* Ability to arrange low cost funds
Strategic Management Plan
Process Plan Evaluation through:
* Product Development * Demand Management * Order Fulfillment
Strategic Management Plan
Competitive Strength through:
* Rivalry amongst Existing Players* Threat of New Entrants * Threat of Substitute Products* Bargaining Power of the Buyers* Bargaining Power of the Suppliers
Strategic Management Plan
Firm’s Strength through:
* Core Competencies
* Market Share
* Infrastructure
* Cash Flow
Strategic Management Plan
Firm’s Capacities:
* Strategic Plans
* Organizational Learning
* Structure and Culture
* Systems
* Motivating Actions
The General Environment
Consists of factors external to the Industry
Includes:* Demographic* Socio-cultural* Political / Legal* Technological* Macro-economic* Global
Successful Strategic Adjustments to the General
Environment:Holds both opportunities for and
threats to expansion Example: Telecommunications / Changing Interest Rates
Developments change competitive battle lines Example: Deregulation of Airlines Sector
Same trends can have different effects on different industries Example: Increasing Health Awareness
Impact differs for different firms within the same industry Example: Rising ATF prices and Low Cost Airlines
Not all developments predictable with accuracy Example: Interest Rate Changes, Inflation, etc.
Impact differs from country to country Example: MNC’s strategies for different countries
Successful Strategic Adjustments to the General Environment:
Components of General Environment
Demographic:
* Ethnic Composition
* Aging of Population
* Maturing of Baby Boom Generation
* Changes in Population Growth and
Decline
Components …. Socio- Cultural:
* Changing Composition of Workforce
* Health and Fitness Awareness
* Erosion of Educational Standards
* Spread of Drug Addictiveness
* Increasing Environmental Concern
Components …. Macro Economic:
* Interest Rate Changes
* Fluctuation in Exchange Rates
* Budget / Trade Deficit and Surplus
* Inflation Rates
* Savings Rates
Components …. Political / Legal:
* Deregulation
* Alliance Governments
* Enactment of Laws
Components …. Technological:
* Process Innovations – Robotics
* Changes in IT
* Biotechnology Development
* Industrial Disasters
Components …. Global:
* Consumer tastes and preferences
* Trade Blocs
* Global Debt
* Global Terrorism
* Increasing economic dependence
Michael Porter's Five Forces Model
Source: Michael Porter - Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York
Industry Competitivene
ss
Rivalry among Existing firms
Suppliers Buyers
Substitutes
Potential Entrants
Threat of
New Entrant
s
Threat of Substitut
e Products
Bargaining
Power of Buyers
Bargaining
Power of Suppliers
The Threat of New Entrants
Implications of New Entrants
* Add to existing production capacity
* Erode market share of existing firms
* Bring substantial resources such as
huge advertising budget, willingness
to spend heavily on R & D
The Threat…..
Barriers to Entry:
* Other advantages – patents, favourable
access to raw materials, favourable location, government subsidies, etc. * Capital Requirements
* Customers switching costs – psychological
or financial * Access to distribution channels
The Bargaining Power of Suppliers
* Impact Company profits in a big way
* Cost increase can get passed
* Quality deterioration may occur
* Suppliers powerful in sectors such as -
soft drink concentrates, sophisticated weapon systems, mainframe
computers, etc.
* Supplies – a big chunk of total cost
What makes Suppliers powerful?
Dominance by few suppliers
Greater concentration among suppliers Size of the customer
Importance of Suppliers product to buyers Example: Coke to McDonald’s High switching costs
Absence of substitutes
High product differentiation Threat of Forward Integration
The Bargaining Power of Customers
Cut quantity purchased
Demand better quality for the same price
Can force prices down
What makes Buyer powerful?
Undifferentiated supplies
Accurate information about the cost structure of the supplier
Price sensitivity of the buyer:* Supplies are significant portion of total cost* Product unimportant to overall quality or cost* Buyer already earns low profits
Threat of Backward Integration
Greater concentration in buyer’s industry
Threat of Substitute Products
Places upper price limit on the product
Number increasing due to deregulation and technological advancements
Example: CD- ROM’s replacing Books
Example: Growth in Banking industry
Encourages switching amongst customer’s
The Intensity of Rivalry among Competitors
Ever increasing competition
* Intense price competition
* Product Differentiation
* Product Innovation
* Increased Advertising spend
Implications include:
Factors resulting in Intense Rivalry
Well-matched rivals
High fixed costs – desire to increase sales Lack of differentiation encourage switching
Large increases in manufacturing capacity
Slow Industry growth encouraging retaliation
High profit earning opportunities High exit barriers
Application of Five Forces FrameworkIndustry v/s Strategic Groups
What are Strategic Groups?
Are grouped together for the purpose of improving analysis and understanding competition within their industry
Cluster of competitors that share similar strategies and therefore compete more directly
Do not necessarily belong to an real group such as Industry Trade Association or Strategic Alliance …….
Strategic Groups may be Homogeneous or Heterogeneous
Homogenous – similarity in terms of Strategies, Product, marketing efforts, R & D expenditure, Capital Intensity, etc.
For Example: Paper MillsHeterogeneous – Group with multiple
strategies For Example: Automobile
Manufacturers
Classification of Strategic Groups:
• Breadth of Market: Niche or Otherwise
• Product and Service Quality: Standard, Premium or Luxury
• Geographical Distribution: Regional, National or Global
• Level of Vertical Integration: Own Production unit or Job Order Production
• Profit or Non-Profit:
Processes for Analyzing External Environment:
Environmental Scanning:
- Done to collect information relevant to
strategy formulation.
- Also known as Gathering Intelligence
- Uses include:
a. Information on competitive
environment
b. Challenging common assumptions
about competitive environment
Processes for Analyzing…..c. Forecasting future developments
d. Identifying and compensating for exposed competitive weaknesses
e. Determining when a strategy is no longer viable or sustainable
f. Indicating when and how strategy be
adjusted to changing environment.
Sources of Information: Information collected by Sales force
from market
Local Newspaper
Databases
Governmental Agencies
Customers and Suppliers
Competitors
Scenario Planning:Scenarios are future environmental events and the firm’s response
Based on assumptions that it is inappropriate to simply identify an outcome and reasonable highs and lows around it
Attempt to identify a set of diverse alternative futures
Highlights forces that shape the future
Processes for Analyzing…..
Avoid focusing exclusively on controllable issues
Actively seek out contrarian views
Do reality checks as scenarios begin to form
Don’t get bogged down in too many scenarios or too may details
Guidelines for Developing Scenarios:
Mckinsey’s 7 S Model:
Strategy
Structure
Systems
Shared Vision
Skills
Staff
Style
Shared Vision
A set of values aspirations often unwritten that go beyond profit, ROI, Growth, etc.
Strategy
Set of actions, plans and policies aimed at attaining sustainable competitive advantage.
Mckinsey’s 7 S Model:
Mckinsey’s 7 S Model:Structure
Firm's reporting line up, the organization chart, functional divisions and their integration
System
Provides flow chart of operations, the processes, quality control systems, manufacturing process and information system.
Mckinsey’s 7 S Model:Style
Working philosophy, time management and interpersonal behaviour, peer group, leading by example
Staff
Career growth of the employees, training patterns and honing intrinsic values
Mckinsey’s 7 S Model:Skills
Capabilities of the combined set of people in the firm
DR. RAJINDER SHRIRAM AURORAPROFESSOR – CONTROL SYSTEMS
AND STRATEGY
Competitive Advantage
Differentiation
Cost Leadership
Quick Response
Differentiation
Firms attempt to create unique bundles of products and /
or services that will be highly
valued by customers
Firm Infrastructure
Human Resource ManagementTechnology Development
Procurement
Inb
ou
nd
Log
isti
cs
Op
era
tion
s
Ou
tbou
nd
Log
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Mark
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Serv
ices
Extensive database on consumers suggests more effective advertising – Celebrity advertising used
Incentive and training programs encourage high qualityProduct and produce better service representatives
Cutting edge product features and patented production gives superior quality products and helps outperform competitors
Purchase of branded components raises finished product image supplemented by effective media space.
Margin
Margin
Superi
or
mate
rial im
pro
ve
qualit
y o
f finis
hed p
roduct
Low
defe
cts
incr
ease
cu
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sati
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ion a
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speci
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tions
Impro
ves
perf
orm
ance
JIT m
inim
izes
dow
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ime
And b
ett
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pin
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dam
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Eff
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aid
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Attributes that Differentiate Products
Physical characteristics of product features: Philips TV
After sales service: WhirlpoolDesirable Image: Fashion product
Technological InnovationReputationManufacturing consistencyStatus Symbol
Implications of Differentiation
Strategy Competitive rivalry lessens with successful differentiation
Brand loyal customers are less price sensitive
New entrants forced to overcome barriers of brand loyalty
Risks associated with Differentiated
StrategySeveral competitors pursuing the same strategy may be perceived equals
Specialists operating in niche markets more successful at differentiation
Attempts to stay a step ahead of the competition may result in “gold plating”
Cost Leadership Achieving low cost position in relation to competitor's
Involves offering no-frills / standardized product aimed at large target market.
Is a relative term – involves cost relative to benefits and cost relative to competitor’s cost.
How Firms achieve Cost Leadership?Firm InfrastructureHuman Resource Management
Technology Development
Procurement
Inb
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nd
Log
isti
cs
Op
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tion
s
Ou
tbou
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Log
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Mark
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an
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ale
s
Serv
ices
• Flatter Organizations• Simplified Information System
• Process breakthrough lowers production costs• Product reformulation allows use of cheaper ingredients
• Healthy employee policies minimize turnover• Training employees reduces waste and scrap
• Global purchasing resulting in low cost components from offshore• Real Estate purchases in rural areas .
Margin
Margin
• L
ong t
erm
rela
tionsh
ip
w
ith v
endors
resu
lts
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ass
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ost
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• E
conom
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xperi
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ais
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over
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• C
om
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• N
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conom
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alls
How Cost Leadership addresses Competitive Forces?Prevents rivals from indulging into price war
Limited pressure from customers to lower prices further
Higher margins improve position to withstand increase in cost by vendors
New entrants find it difficult to compete due to lack of experience
Facilitates competition with substitute products
Risk associated with Cost Leadership
Strategy Undesirable for second most competitive firm
Leads to desirable product attributes getting eliminated
Strategy can be duplicated by competitors
Limits firm’s abilities to remain competitive
Quick ResponseCost leadership and differentiation lead to a situation “atarimae hinshitsu” – value taken for granted
Race for determining new competitive advantage started
Focus shifted to Response Time
Quick ResponseQuick Response refers to
the speed with which a new product,
product improvement or a managerial decision can be made
Research shows that slow response to customer’s needs forces them to look for alternatives
Firm InfrastructureHuman Resource Management
Technology Development
Procurement
Inbou
nd
Logis
tics
Ope
ration
s
Out
boun
d
Logi
stic
sM
arke
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rvic
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• Faster adjustments to trends due to Top Mngt.• Timely data available due to MIS
• New products developed due to Product Development • New process invention reduces production time
• Well executed training programs resulting in productive workers
• Work with suppliers ensures each incorporates latest technological advances
Margin
Margin
Ware
house
loca
tion
min
imiz
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ship
pin
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educe
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• JIT
reduce
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our
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sponse
tim
e
How Firms achieve Quick Response?
Competitive Advantage through Quick Response
Development of new productsProducts CustomizationImproving existing products Timely delivery of ordered products
Quick adjustment of marketing efforts
Answering customers queries
Quick response time vis-à-vis Five Forces
Firms can avoid head-to-head rivalry
Firms can charge premium price
Encourage quick response from suppliers
Greater flexibility in dealing with new entrants and substitute products
Quick Response – A strategy not always
beneficialLack of systems that facilitate competition on response time
Speed not important to all customers
Can create stressSpeed for the sake of speed does not lead to competitive advantage – value addition prime
Higher Market Share
Greater Relative Sales
Lower Relative Prices
Lower Relative Costs
Higher Relative Sales Volume
Higher RelativeProduction Volume
More Rapid Gains In Experience
Faster Progress Down the Experience Curve
The Cycle of Experience Effects
Competitive Advantage across Market Life Cycle
Introduction:
First Mover Advantage
Strong Brand Recognition
Strong Differentiation Advantage
Growth:
Associated with glamour and success
Demand grows faster than supply
Reasons: Less price pressure, exciting technological development, increasing sales volume
Assumptions made during Growth Growth is easy to achieve
Less price pressure in growth markets
Development of critical expertise easier in growth markets
Maturity:
Lack of continuous growth
Key technology benefits disappear
Cumulative experience fails to provide benefits
Growing trend to compete on the basis of price
Why are price wars detrimental?
Profits are price sensitive
Advantages are short lived
Future expectations increase
Customers shop for low prices rather than value and benefits
Practices followed to avoid Price Wars
Avoiding strategies that force competitors to respond with lower prices
Avoiding all possible misreading of competition
Avoiding overreacting to competitor’s price cuts
Using jawboningRepositioning your product from a
commodity to a differentiated position
Decline:Adopt “milking”Strategies include:
* Divestment* Harvest* Niche* Leadership
Diversification
Is a process that: Improves the core business execution
Enhances the unit’s structural position
Increases the competitive advantage
Creates value for the shareholder’s
Forms of Diversification
Vertical Integration
Is one where a corporation performs more than
one step of the process involved in converting raw materials into a product
delivered and ready for consumption and the integration is so efficient that one business feeds the other.
Benefits of Vertical Integration
Elimination or reduction of transaction costs
Improved coordination
Keeps inside counterparts honest and on their toes
Limits to Vertical Integration
May upset the minimum efficient scale of the firm
Reduces flexibility and makes products outdated and non-competitive
Makes firm susceptible to strikes
Difficulties integrating different specializations
When to Integrate Vertically?Are our existing suppliers or customers
meeting the final consumer’s needs?
How volatile is the competitive situation?
Is it possible to “own” a business without actually buying it?
Will vertical integration enhance the structural position of the business?
Horizontal Diversification
Entails moving into more than one industry
For Example: Retailing of FMCG Products and Petroleum Products by Reliance
Why Horizontal Diversification?
Better financial strength
Expertise to run diverse business
Economies of Scale
Higher profitability
Case against Conglomerates?Conglomerate Discounts – stock sells less
for than the total of the individual stocks would sell for
Discount determined using P/E ratio – higher the ratio more the value of stock
Gave rise to the concept of Corporate Raiders – Acquiring a conglomerate and then selling individual parts to earn huge gains without actually running the business even for a day
Takeover Premiums
Takeover Premiums
Difference in the normal trading price of the takeover’s target’s stock and the price required to entice shareholder's to sell enough shares to acquire controlling interest
Risky as the corporate stock may become worthless subsequently and lead to conglomerate discount
Global Diversification
Acquiring a global company or entering into strategic alliance with a global partner
Facilitates operations at a global level
Helps launch in the global arena with ease
Means of Diversification
Acquisitions
Refers to purchase of a company that is already in operation
Facilitates quick diversification and improvement in the value of stockholder’s investment
Pre-acquisition Management
Analyze the deal itself:* Cost of Acquisition* Benefits from the deal* Financing of the deal* Returns from the deal
Analyzing the human, organizational and cultural aspects of acquisition
• Determine potential ability of the firm to increase competitiveness
• Actions needed include* Setting stretching targets * Define key top positions* Pick the best people* Commit adequate resources* Anticipate and prioritize senior management agenda* Listen and transmit
Strategic Alliance
Refers to arrangements in which corporations join forces to form cooperative partnership
Neither company owns the other – third entity created
Strengths of one offset the weakness of the other
Coordination difficult due to differences in goals, strategies, procedures and cultures
Avoiding conflict in Joint Ventures
Discuss the following:* Mission of the new business* Market’s it will serve* Products it will offer* Obligations of each partner* Procedure for dissolving the venture
Do not depend on the contract to make joint venture successful
Do not try to short change your partner
Internal Development
Refers to building new businesses more or less from ground up – Corporate Entrepreneurship
Four Strategies adopted:* Act as Venture Capitalists * New Venture Incubator* Idea generation and transfer program* Intrapreneurialship
Benefits of Diversifications
• Capitalizing on Core Competencies
• Increasing market power
• Sharing Infrastructures
• Balancing financial resources
• Maintaining Growth
• Reducing Risk
The Growth Share Matrix
Analysis projects two factors that predict success* The growth rate of the market within
which the business competes* Its share of that market
Entities in fast growing markets need more cash than they have and vice versa
The Growth Share Matrix
Star Cash Cow
Problem Child
Dog
Source: BCG
Market Growth
High Low
High
Low
Mark
et
Share
Analysis of Matrix Cash Cows
* Expected to produce more cash than can be
usefully employed in the house
* Businesses often “milked” to finance other
businesses that influence the success of the Corporation
Dogs
* Are businesses holding small shares of slow growing or declining markets* Unlikely to ever become important
sources of cash generation* Are great users of cash for which there
is little return* Adopt “Harvest” strategy – Do not invest
; shift cash flows to more promising business
Problem Child
* Low market shares of rapidly growing markets
* Represent a potential opportunity* Increase in their market share can make
them cash cows but failure can make them dogs* Strategy – investing and exploiting opportunity or not investing and missing opportunity
Stars* Hope of the future* Hold large market share currently* Cash flows minimal or even negative* Strategy to nurture them, maintain
their health and wait for the market to slow
to increase cash flows* Cash hungry start get transformed into
cash cows that can be milked to nurture another generation of businesses
Competitive Strength Matrix:
BCG fails to consider other issues affecting cash flow other than market growth and market share
CSM depicts various strategic issues beyond simply growth
Provides a useful bridge between strategy formulation at business and corporate level
PUSH
Inve
st A
ggress
ively
CAUTION
Inve
st S
elect
ively
DANGER
Harve
stLow
Moderate
High
Introduction Growth Maturity Decline
Stage of Market Life Cycle
Com
peti
tive S
trength
Industry Attractiveness – Business Position Matrix
Considers the matters discussed in other frameworks and incorporates other considerations
Facilitates subjective evaluation of overall industry attractiveness and business position
Industry Attractiveness is the subjective assessment based on broadest possible range of external opportunities and threats beyond the strict control of management
Business Position is assessment of how strong a competitive advantage is created by the firm’s internal strengths and weaknesses
Low
Moderate
High
High Medium Low
Industry Attractiveness
Bu
sin
ess
Posi
tion Invest Selective
GrowthUp or Out
Harvest
Divest
Up or Out
Up or Out
Selective Growth
Harvest
Factors ConsideredIndustry Attractiveness:(a) Bargaining Powers of Suppliers:Relative Size of playersNumbers of eachImportance of purchases from or sales toAbility to integrate vertically
(b) Threat of Substitute Products/ New
Entrants:Technological MaturityDiversity of the MarketBarriers to EntryFlexibility of Distribution System
(c) Nature of Competitive Rivalry:Number of CompetitorsSize of CompetitorsPrice WarsCompetition on Multiple dimensions
(d) Economic Factors:Scale VolatilityCyclicality of Demand Market GrowthCapital Intensity
(e) Financial Norms:Average profitabilityTypical Leverage Credit Practices
(f) Socio Political Considerations:Government RegulationCommunity SupportEthical Standards
Factors ConsideredIndustry Attractiveness:
(a) Level of Differentiation:Advertising EffectivenessProduct QualityCompany ImagePatented ProductsBrand Awareness
(b) Cost Position:Economies of ScaleManufacturing CostsOverheadsScrap / Waste / ReworkLabour Rates Patented Processes
(c) Response Time:Manufacturing FlexibilityTime needed to introduce new
productsDelivery Time
(d) Financial Strength:SolvencyLiquidity BEPCash Flows Profitability Growth in Revenues
(e) Human Assets:TurnoverSkill LevelRelative WageMoraleManagerial CommitmentUnionization
(f) Public Approval:GoodwillReputationImage
Global DiversificationBenefits:
Lower operational costs
Can supplement limited domestic opportunities
Willingness to fight international competition on home turf – Fuji Xerox
Disadvantages:Greater risk
Complex structure
Differences in customer requirements and ways of competing
Differences in organizational cultures and managerial practices
Strategies
Exporting
Licensing and Franchising
Joint Ventures
Wholly Owned Subsidiaries
International Strategy and Competitive Advantage:
Differentiation
Cost Leadership
Quick Response
Government regulations as a Source of Competitive Advantage:
Regulators
Co-negotiators
Suppliers
Customers
• Involves a broad range of efforts aimed at transforming strategic intentions into actions.
• Constitutes firm’s realized strategy
• Ability to implement strategies is one of the most valuable managerial skills
Why Strategy Implementation is Difficult?Organizational Immune System –
Resist change
Difficult Paradoxes – Participative management and motivating subordinates to accept change
Number of variables involved
Interlink between factors affecting change
Need to change everything at once
Activity Centered Change Programs
• Analyses common pattern of failure in introducing change
• Focus is on change centered on an activity that is suppose to bring change rather than on desired results
• Individual elements reflect rationality yet fail collectively
Elements of Activity Centered Change Program:
Senior management, dissatisfied with past performance, develops new strategic ideas requiring organizational change Example: Declining sales leading to shift in strategy of improving customer satisfaction
Initiating a program for producing
desired changeExample: Initiating program “Customer is King”
Management of program is delegated to those in staff positionsExample: King Customer Program handed over to Director of Quality
Senior Management is “handled” by staff personnel in charge of the programExample: CEO’s speech prepared by Director of Quality
Staff in charge of the program focus on range of issues under their direct controlExample: Director of Quality develops new training program
Performance measured by success of the
programExample: Number of people graduating from the new training and development program
A small change is accepted as success of the programExample: Success of the training program
To continue the change initiative new programs introducedExample: New program to reduce cost initiated
Confusion with regards to old and new program as the same can conflictExample: Cost reduction by eliminating quality programs
Cynicism creeps in and status quo supportedExample: Every new program looked upon as a bother
Strategic Programming
Strategy formulated on the basis of pre-established missions and objectives
Short range programs evolved to implement strategy
Budgets evolved to provide monetary resources
Results evaluated and put in feedback loop Used first by Robert McNamara, Secretary
of Defence Also known as Planning, Programming and
Budgeting System
Generic Model of Strategic Programming
Introduction of Mission
Derivation of Objectives
Identification of Alternative Strategies
Evaluation of Alternatives
Selection of Preferred Alternatives
Creation of Master Plan / Program
Creation of Medium run Plan / Program
Creation of Short run Plan / Program
Evaluation of Results
Fee
db
ack
Lo
op
Establish Master Budget
Establish Medium Run Operating Budget
Establish sort run tactical BudgetS
trat
egy
Fo
rmu
lati
on
Str
ateg
y Im
ple
men
tati
on
Limitations of Strategic Programming
Required Conditions:
* Stability* Simplicity* Industry Maturity* Capital Intensity* Tightly Coupled Operations* External Control
Organizational Learning
Result of knowledge based competition
Is combination of discovering new things and acting in ways that allow the organization to adapt to changes and sustain and improve competitiveness
Called for since business units face uncertain conditions and survival depends on learning and adapting to new ways
Stephen Covey States One level of learning
well suited to management is like climbing a ladder;
but higher level of Learning, one that requires leadership,
involves questioning whether or not
the ladder is leaning against the right wall
The Model of Organizational Learning
Learning from History
and Experience
Systematic Problem Solving
Experimentation with
New Approaches
Learning from the Best Practices of
Others
DISCOVERY
ACTION
Incremental Adaptive Changes
Quantum Generative
Changes
EvolutionaryActs
RevolutionaryActs
Strategic Leadership Strategic leadership involves:Strategic leadership involves:
the ability to anticipate, envision, the ability to anticipate, envision, maintain flexibility and empower maintain flexibility and empower others to create strategic changeothers to create strategic change
multi-functional work that involves multi-functional work that involves working through othersworking through others
consideration of the entire enterprise consideration of the entire enterprise rather than just a sub-unitrather than just a sub-unit
a managerial frame of referencea managerial frame of reference
SuccessfulStrategic Actions
Strategic Leadership and the Strategic
Management ProcessEffective Strategic
Leadership
Strategic Intent Strategic Mission
shapes the formulation of
andinfluence
Strategic Leadership and the Strategic Management Process
StrategicCompetitiveness
Above-Average Returns
Formulationof Strategies
Implementationof Strategies
SuccessfulStrategic Actions
yields
Factors Affecting Managerial Discretion
External Environment
•Industry structure•Rate of market growth
•Number and type of competitors
•Nature and degree of political/legal constraints
•Degree to which products can be differentiated
External Environment
Factors Affecting Managerial Discretion
Characteristics of the Organization
Characteristics of the Organization
•Size•Age•Culture•Availability of resources
•Patterns of interaction among employees
External Environment
Factors Affecting Managerial Discretion
External Environment
Characteristics of The Organization
Characteristics of The Manager
ManagerialDiscretion
Characteristics of the Manager
•Tolerance for ambiguity
•Commitment to the firm and its desired strategic outcomes
•Interpersonal skills•Aspiration level•Degree of self-confidence
Exercise of Effective Strategic Leadership
Establishingbalanced
organizationalcontrols
Emphasizingethical
practice
Developinghumancapital
Exploiting andmaintaining
corecompetencies
Sustainingan effective
organizationalculture
Determiningstrategicdirection
Effective StrategicLeadership
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