strategic management unit i&ii

STRATEGIC MANAGEMENT

2

MEANING & DEFINITION Strategic Management can be defined as “the

art and science of formulating, implementing

and evaluating cross-functional decisions that

enable an organization to achieve its objective.”

Definition:

“The on-going process of formulating,

implementing and controlling broad plans guide

the organization in achieving the strategic

goods given its internal and external

environment”.

COMPARISON

STRATEGIC TACTICAL OPERATIONAL

Long range Intermediate Short range

3 or more yrs 2-3 yrs One yr

Top mgt Middle Lower

Broad objectives Integration of departments Day to day working

Focus on planning &

forecasting

On co-ordination On control

Levels of Strategy

Corporate –Level

Business-Level

Functional -Level

BUSINESS POLICY

Business policy provides a basic

framework defining fundamental issues of a

company, its purpose, mission and broad

business objectives and a set of guideline

governing the company's conduct of

business within its total perspective.

Overall Guide

Focus on strategic allocation of scarce resources

Types of Policies

MAJOR POLICIES:

Lines of business

Code of ethics

SECONDARY POLICIES:

Selection of geographic area

Identification of major customers

Major products

Types of Policies

FUNCTIONAL POLICIES: Production

Marketing

Finance

Personnel

Research

RULES:

Salary & wage Adm.

Discipline& discharge

Welfare Adm

Safety & health

Strategy Vs Policy

STRATEGY POLICY

Strategic decisions Guidelines

Putting a policy into

effect

General course of action

Deals with crucial

decisions, requires top

mgt involvement.

Once formulated can be

delegated to lower levels

STRATEGIC

MANAGEMENT PROCESS

STRATEGIC MANAGEMENT PROCESS

SMP

1. Vision formulation which leads to the

statement of the Mission.

2. The mission is then converted into

performance Objectives

3. To achieve objectives you develop

Strategies

4. Strategy Implementation

5. Evaluation of performance

Purpose of SMP

CORE COMPETENCE

SYNERGY

VALUE Creation

CORE COMPETENCE

An organization’s core competence

is something it does exceptionally

well in comparison to its

competitors. It reflects a distinct

competitive advantage like superior

research, development etc..

SYNERGY

Two or more sub systems working

together to produce more than the

total of what might they produce

working alone.

Ex:1+1=3

VALUE CREATION

Exploiting core competencies and

achieving synergy help organizations

create value for customers. Value is

the sum total of benefits received and

cost paid by the customer.

Steps in SMP

Vision, Mission, Objectives

External Analysis

Internal analysis

STRATEGIC INTENTVision,Mission,Objectives

Strategic intent is about clarity, focus

and inspiration.

VISION

MISSION

OBJECTIVES

GOALS

PLANS

VISION

Corporate vision is a short and inspiringstatement of what the organization intendsto become and to achieve at some point inthe future, often stated in competitive terms.

Vision refers to the category of intentionsthat are broad, all-inclusive and forward-thinking. It is the image that a businessmust have of its goals before it sets out toreach them.

It describes aspirations for the future,without specifying the means that will beused to achieve those desired ends .

Mission

Mission Statement describes what business you’rein and who your customer is. As such, it capturesthe very essence of your enterprise - itsrelationship with its customer.

Developing mission statement is the step whichmoves your strategic planning process from thepresent to the future.

It depicts the mission statement connects “today”with the “future.” Your mission statement must“work” not only today but for the intended life ofyour strategic plan of which your mission statementis a part.

If you’re developing a five year strategic plan, forexample, you develop a mission statement whichyou believe will “work” for the next five years.

Values

For any statement, whether mission or

vision, to be embraced and acted upon, it

must reflect the values of your organization.

Values describe what your management

team really cares about. How would your

managers respond to a trade-off between

product quality and profit? That’s really a

question of value.

Corporate Goals & Objectives

Role of Objectives:

1. Legitimacy

2. Direction

3. Coordination

4. Benchmarks for success

5. Motivation

Characteristics of obj;

Obj. form a HIRERACY

Network

Multiplicity of Obj

Long and short-range obj

ENVIRONMENTAL ANALYSIS

Environment may be defined as the set of external factors such as economic, socio cultural, Govt. & legal, demographic, which are uncontrollable in nature & affect the business decisions of a firm or company.

1) Micro Environment

2) Macro Environment

Micro Environment-

1) Supplier

2) Customers-industrial, retailers, wholesalers, Govt., foreigners

3) Market intermediates- middlemen, physical distribution firms, marketing service agencies, and financial intermediaries

4. Competitors-

Desire competitions – limited disposable income many unsatisfied desires T.V./washing machine/ investment

Generic competition-among alternatives which satisfied particular category of desire- Investment in U.T.I./P.O./Bank/Any other.

Product form competition- Washing machine, semi/ automotive

Brand competition- Videocon/godrej

5. Public –

media

citizen action public

local public

Macro Environment -uncontrollable

1. Economic Environment

Eco. Conditions- business cycle, growth of economy, size of domestic Market & its dynamic effect

Eco. Policies- budgets, industrial regulations, eco planning, import & export regulations, business laws, , industrial policy, control on price & wages, trade & transport policy, size of national income, demand & supply of various goods

Economic System—of a country

free enterprise i.e. capitalist

socialist

communist

mixed

2. Political & Govt. Environment. -

Legislature- decide particularly

course of action

Executive -implementation

Judiciary -to see above both

working public interest.

3. Socio Cultural Environment-people attitude to work & health, role of family, marriage, religion & education, ethical issues, social responsibilities of business

4. Natural Environment- geographical & ecological factors- natural resources endowments, weather & climatic conditions, topographical factors, locational aspects, port facilities

5. Demographic Environment. - Size growth age composition of population, family size, economic stratification of population, educational level, caste religion etc.

6. Technological Environment-marketing, innovation, R & D

7. International Environment-liberation force of view global perspectives

Environmental Scanning:

It helps every mgt in attaining maximum

profits and growth and the same time helps

in minimization of future threats.

Environment analysis has 3 basic objectives

Under taking of current & potential changes

Should provide inputs for strategic decision

making

Rich source of idea & understanding of the

context, bring fresh views

Environmental Analysis-

Scanning

general supervision of all env. Factors & their interaction in order

1. to identify early signals of change,

2. Detect env. Changes underway

Monitoring

tracking the env. Trends sequences of events or stream of activities. Study of Indicators, assemble data to discern emerging patterns. Three outcomes emerges in monitoring

1. A specific description of env. trends

2. Identification of trends

3. Identification of areas of further scans

Forecasting - scanning & monitoring provide a picture of what is happening strategic decision Making requires future orientation. Forecasting is developing future projections of changes

Assessment - outputs of above 3 steps are assessed to determine implementation. Assessment involves identifying & evaluate how & why current & projected env. Changes affect strategic Mgt. Of the organization

Techniques of Environment Analysis

SWOT Analysis, strengths, weakness, opportunities, & threats.

Forecasting methods

Time services analysis & projection-moving averages, exponential smoothing book Jenkins, trend projection.

Casual Methods- regression model, econometric model, anticipation surveys, input output model, diffusion index, leading indicators, life cycle analysis.

Qualitative Method-Delphi method, market research, panel consensus, visionary forecast, historical analogy.

Scenario technique- preparation of background, selection of critical indicators, establishing past behavior of indicators, verification of potential future events, forecasting the indicators, writing of scenario.

Preparation of ETOP-environmental threat & opportunity profile is a summary of environmental factors. It is a structured way. Assessing Importance of environmental factors, assessing impact factor combining importance & impact factor.

Environmental Scanning &

Monitoring

•Environmental scanning is a concept from

business management by which

businesses gather information from the

environment, to better achieve a

sustainable competitive advantage.

•To sustain competitive advantage the

company must also respond to the

information gathered from environmental

scanning by altering its strategies and

plans when the need arises.

Environmental Scanning &

Monitoring- Techniques

SWOT

Industry Analysis

Techniques

Competitor

Analysis

PEST QUEST

SWOT(Strength-Weakness-Opportunity-Threat)

Identification of threats andOpportunities in the environment(External) and strengths andWeaknesses of the firm (Internal) is thecornerstone of business policyformulation; these factors whichdetermine the course of action toensure the survival and growth of thefirm.

What is “PEST”?

PEST Analysis – The Meaning

A PEST analysis is an analysis of the external macro-

environment that affects all firms.

P.E.S.T. is an acronym for the Political, Economic,

Social, and Technological factors of the external

macro-environment.

Such external factors usually are beyond the firm's

control and sometimes present themselves as threats.

However, changes in the external environment also

create new opportunities.

A. Industry Life Cycle Analysis

B. Study of the structure and

characteristics of an Industry

C. Profit Potential of Industry (Porter

Model)

Industry Analysis: Three sections

A. Industry Life Cycle Analysis

Four Stages:

Pioneering Stage

Rapid Growth Stage

Maturity and Stabilization Stage

Decline Stage

B. Study of the structure and

characteristics of an Industry

1. Structure of the Industry and nature of Competition

2. Nature and Prospectus of the demand

3. Cost, Efficiency and Profitability

4. Technology and Research

Michael Porter has argued that the profitpotential of an industry depends on thecombined strength of the:

1. Threat of new entrant

2. Rivalry among existing firms

3. Pressure from substitute products

4. Bargaining power of buyers

5. Bargaining power of sellers

3. Profit Potential of Industry (Porter

Model)

INTERNAL ANALYSIS

SWOT analysis

Value chain Analysis

Financial Analysis

Key factor rating

Functional area profile

Strategic advantage profile

Internal Analysis

Resource-Based View

Firms have heterogeneous resources and capabilities.

By exploiting core competencies, firms can develop value-creating strategies superior to their competitors.

Four criteria must be met for a sustained competitive advantage.

Valuable

Costly to imitate

Rare

Non-substitutable

Internal Analysis

Resources• Tangible• Intangible• Brand Equity

Capabilities

Core

Competencies

Competitive

Advantage

Above-Average

Returns

Components of the Resource- Based View

Internal Analysis

Resources and Capabilities:

Resources

• Represent what the firm has to work with.

• Resources must be combined to establish a capability.

• Types:

• Tangible

• Intangible

• Brand Equity

Internal AnalysisTangible Resources – Assets that can be seen, touched or quantified.

- Financial resources (borrowing capacity)- Physical Resources (facilities, locations)- Organizational structure (reporting structures)- Technological (patents)

Intangible Resources

- Human resources (experience, training)- Resources for innovation (technical employees, facilities)- Reputation

Brand Equity

- Brand name- maintaining brand equity (Mercedes example – value/performance and Japanese automakers)

Portfolio Analysis

And

BCG Matrix

The Growth Share Matrix

It evaluates the strength of a firm from the portfolio

of businesses or products the firm has in different

stages of PLC, which are required for future growth.

It analyses the impact of investing resources in

different SBUs on the corporate’s future earnings

and cash flow.

SBUs are evaluated from two ways

1. Industry attractiveness (market growth)

And

2. Competitive strength (relative market share)

The Growth Share Matrix

A Matrix is created considering the market

growth and relative market share of all the

businesses in their respective industries

and businesses are placed in that matrix for

analysis and evaluation.

The Growth Share Matrix

The market growth rate on the vertical axis is

the proxy measure for the industry

Attractiveness.

The relative market share is proxy for its

competitive strength in the industry.

BCG Growth-Share Matrix

In BCG approach, the company classifies all its SBUs into 4 types as

“star”,

“cash cow”,

“question mark”

and

“dog”

according to their market growth and relative market share.

The BCG Matrix

Source: Perspectives, No. 66, “The Product Portfolio,” Adapted by permission from The Boston Consulting Group, Inc., 1970.

Relative market share

Cash cows Dogs

High

Low

Questionmarks

Stars

Mark

et

gro

wth

rate

Cash cows Dogs

High

High Low

Questionmarks

Stars

High

Low

Low

$

?Stars

Cash Cows Dogs

Problem Child

Relative market share

Mark

et

gro

wth

rate

M

ark

et

gro

wth

rate

Relative market share

Mark

et

gro

wth

rate

BCG Matrix

Stars

Cash Cows Dogs

Problem Child

Relative market share

Mark

et

gro

wth

rate

M

ark

et

gro

wth

rate

Relative market share

Mark

et

gro

wth

rate

BCG Matrix

Revenue ++++

Expenses _ _ _

Net +

Revenue +

Expenses _ _ _ _

Net _ _ _

Revenue + + + + +

Expenses _

Net + + + +

Revenue + +

Expenses _ _ _ _

Net _ _ _

BCG Market Share/Market Growth Matrix

BCG Matrix

Dogs are businesses that have a very small

share of a market that is not expected to

grow.

Cash cows are businesses that have a

large share of a market that is not expected

to grow substantially.

Question marks are businesses that have

only a small share of a quickly growing

market.

Stars are businesses that have the largest

share of a rapidly growing market.

Stars

are high-growth, high-share businesses or

products. They often need heavy

investment to finance their rapid growth.

Therefore, they may not be producing a

positive cash flow. The business strategy

will generally be for growth fueled by

externally acquired capital. Eventually,

their growth will slow, and they will turn into

cash cows.

Cash cows

are low-growth, high-share businesses or

products. These established and successful

SBUs need less investment to keep their

market share. They produce a lot of cash to

be used for other business units of the

company. They are either milked for

investment in stars or question marks or

harvested if there is little optimism for a

stable future.

Question marks

sometimes called problem children, are low-

share business units in high-growth markets.

They need a lot of cash to keep and increase

their share; they can not generate enough

cash themselves. Management must decide

which question mark it should build into stars

and which should phase out.

Dogs

are low-growth, low-share businesses and products. They often have poor profitability. Therefore, the business strategy for a dog is most often to divest, but occasionally to hold for possible strategic repositioning as a question mark or cash cow.

Portfolio Strategies

FourPortfolio

Strategies

BUILDDoes the SBU have the potential to be a star?

HOLD

Can you maintain and preserve market share?

DIVEST

Is it appropriate to dump SBU’s

with low-growth potential?

.HARVEST

Increase the short-term return without

impacting long-run prospects.

Limitations of the BCG Matrix

1. Market Growth rate is an inadequate descriptor of overall industry attractiveness.

2. Relative market share is inadequate as a descriptor of overall competitive strength.

3. The analysis is highly sensitive to how growth and share are measured.

4. It provide little guidance on how best to implement the investment strategies.

5. The model implicitly assumes that business units are independent or one another except for the flow of cash.

How to Identify SBUs?

It is the basic competitive unit of a company.

It has a specific and identifiable group of

customers.

It has specific and identifiable competitors.

It can be measured as an independent entity in

terms of profit and loss.

Therefore, it may require a separate marketing

strategy.

GE / McKinsey Matrix

In consulting engagements with General

Electric in the 1970's, McKinsey &

Company developed a nine-cell portfolio

matrix as a tool for screening GE's large

portfolio of strategic business units (SBU).

This business screen became known as the

GE/McKinsey Matrix and is shown below:

The GE matrix has nine cells vs. four cells

in the BCG matrix.

The GE / McKinsey matrix is similar to the BCG growth-share matrix in that it maps strategic business units on a grid of the industry and the SBU's position in the industry. The GE matrix however, attempts to improve upon the BCG matrix in the following two ways:

The GE matrix generalizes the axes as "Industry Attractiveness" and "Business Unit Strength" whereas the BCG matrix uses the market growth rate as a proxy for industry attractiveness and relative market share as a proxy for the strength of the business unit.

The vertical axis of the GE / McKinsey matrix is industry attractiveness, which is determined by factors such as the following:

Market growth rate

Market size

Demand variability

Industry profitability

Industry rivalry

Global opportunities

Macroenvironmental factors (PEST)

Industry Attractiveness

Each factor is assigned a weighting

that is appropriate for the industry.

The industry attractiveness then is

calculated as follows:

The horizontal axis of the GE / McKinsey matrix is the strength of the business unit. Some factors that can be used to determine business unit strength include:

Market share

Growth in market share

Brand equity

Distribution channel access

Production capacity

Profit margins relative to competitors

The business unit strength index can be calculated by multiplying the estimated value of each factor by the factor's weighting, as done for industry attractiveness.

Business Unit Strength

Industry attractiveness and business unit strength are calculated by first identifying criteria for each, determining the value of each parameter in the criteria, and multiplying that value by a weighting factor. The result is a quantitative measure of industry attractiveness and the business unit's relative performance in that industry

Industry attractiveness =

factor value1 x factor weighting1

+ factor value2 x factor weighting2+…

GE MATRIX contd..

Each business unit can be portrayed as a circle plotted on the matrix, with the information conveyed as follows:

Market size is represented by the size of the circle.

Market share is shown by using the circle as a pie chart.

The expected future position of the circle is portrayed by means of an arrow.

Plotting the Information

The shading of the above circle indicates a 38% market share for the strategic business unit. The arrow in the upward left direction indicates that the business unit is projected to gain strength relative to competitors, and that the business unit is in an industry that is projected to become more attractive. The tip of the arrow indicates the future position of the center point of the circle.

The following is an example of such a representation:

Resource allocation recommendations can be made to grow,

hold, or harvest a strategic business unit based on its position

on the matrix as follows:

Grow strong business units in attractive industries,

average business units in attractive industries, and strong

business units in average industries.

Hold average businesses in average industries, strong

businesses in weak industries, and weak business in

attractive industries.

Strategic Implications

Harvest weak business units in unattractive industries, average business units in unattractive industries, and weak business units in average industries.

There are strategy variations within these three groups. For example, within the harvest group the firm would be inclined to quickly divest itself of a weak business in an unattractive industry, whereas it might perform a phased harvest of an average business unit in the same industry.

LIMITATION GE

While the GE business screen represents an improvement over the more simple BCG growth-share matrix, it still presents a somewhat limited view by not considering interactions among the business units and by neglecting to address the core competencies leading to value creation. Rather than serving as the primary tool for resource allocation, portfolio matrices are better suited to displaying a quick synopsis of the strategic business units.

GE Mckinsey Matrix

HOLDLow

AVERAGE

High

WEAKAVERAGE

STR

- ONG

Bus Str Ind at

GROW

HOLD

HARVEST