strategy primer

STRATEGIC

MANAGEMENT FOR

BATCH 2013-15

What is Strategy? – 1/2

2 Strategic Management for Batch of 2015 www.consult-iimi.com

Word Origin :

Greek word Strategia, office of a general; linked to Strategos and means

‗the science and art of using all the forces of a nation to execute approved plans

as effectively as possible during peace or war‘; strategy thus refers to deployment of

troops; Once the enemy has been engaged, attention shifts to tactics!

The concept of strategy has been borrowed from the military and adapted

for use in business. Substitute the troops with resources and you get business

strategy!

Together, strategy and tactics bridge the gap between goals and means. In

other words, the ways and means of defining and achieving goals is what is called

strategy. It is the reflection of a company‘s game plan

What is Strategy? – 2/2

• Strategy is a plan for getting from here to there.

• Strategy is a pattern in actions over time

• Strategy is a position, that reflects your business decisions

• Strategy is perspective, of a business problem and its solution

How is strategy different from tactic?

Strategy is a general framework that provides guidance for actions to be

taken and, at the same time, is shaped by the actions taken(tactics). While strategy

changes something for good, tactics can quickly degenerate into nothingness. The

right strategy makes any tactic work better. While strategy is intuitive, tactics are

instinctive!

Eg: Google‘s strategy is to maximize traffic by providing free services

Some of its tactics range from launch of Google Chrome and acquisition of

You-Tube to development of new technologies like Picasa, Google Docs and

Android apps

The process of Strategy formulation

Vision and Mission

• Who we Are

• Who we want to be

Environment Scanning

• PEST

• Porter‘s 5 Forces

• SWOT Analysis

Strategy Formulation

• Generic Strategies

Implementation

• Diamond Framework

• Ansoff Matrix

Evaluation & Control

• BCG Matrix

• GE Matrix

Vision & Mission Statement

The first step in strategy formulation form a firm is deciding it‘s Vision & Mission

statements. There are certain core ideals that remain relatively steady for a company

and provide guidance in the process of strategic decision-making. These unchanging

ideals form the business vision and are expressed in the company‘s mission

statement

The mission statement communicates the firm's core ideology and visionary goals,

generally consisting of the following three components:

1. Core values, to which the firm is committed

2. Core purpose of the firm and

3. Visionary goals, the firm will pursue to fulfill its mission

Simply put, these act as the goals for the firm. Without this, strategy formulation

becomes meaningless.

Strategic Management for Batch of 2015 www.consult-iimi.com

A B C D E F G H

Vision & Mission Statement - Exercise

1. To bring inspiration and innovation to every athlete in the world

2. To be the world's best quick service restaurant experience

3. To refresh the world & inspire moments of optimism and happiness

4. Every Home… Everywhere… with Pride, Passion and Performance

5. To be the most successful & respected lift truck company in U.S

6. To build a place where people can come to find and discover anything they

might want to buy online

7. To be the world leader in transportation products & related services

8. Helping People Around the World Eat and Live Better

Match the following Vission & Mission statements to the respective companies:

Vision & Mission Statement – Answers

1. To bring inspiration and innovation to every athlete in the world

2. To be the world's best quick service restaurant experience

3. To refresh the world & inspire moments of optimism and happiness

4. Every Home, Everywhere with Pride, Passion and Performance

5. To be the most successful & respected lift truck company in U.S

6. To build a place where people can come to find and discover anything

they might want to buy online

7. To be the world leader in transportation products & related services

8. Helping People Around the World Eat and Live Better

Environmental Scanning

Once the vision & mission statements have been framed, it is imperative to

do environmental scanning before the formulation of strategy. It is to be done at three

levels.

• Macro Environment – Using PEST Analysis

• Industry Analysis – Using Porter‘s 5 Force

• Internal Firm‘s Analysis – Using SWOT Analysis

Based on the analysis, the strategy can be formulated, along the lines of the

Generic Strategies prescribed by Porter.

We shall see each of these models one by one

PEST analysis deals with the analysis of macro-environment that comprises Political,

Economic, Social and Technological factors. It can also be extended to PESTEL by

adding Environmental & Legal factors. The various factors that come under this

analysis are:

Political factors:

• Tax policy

• Employment laws

• Environmental regulations

• Trade restrictions and tariffs

• Political stability

Social Factors:

• Health consciousness

• Population growth rate

• Age distribution

• Career attitudes

• Emphasis on safety

Economic factors:

• Economic growth

• Interest rates

• Exchange rates

• Inflation rate

Technological:

• R&D activity

• Automation

• Technology incentives

• Rate of technological change

PEST Analysis

Porter’s 5 Force – 1/2

The industry level analysis is usually done through Porter‘s 5 force framework. It

helps a firm to decide whether to enter an industry or not. Obviously, you would

realize that for an industry to be attractive for entry, you would want all these 5

aspects to be categorized as low. You may see in the next slide what constitutes

these 5 aspects in detail.

Supplier Power

Buyer Power

Threat of

Substitutes

Threat of

New Entrants Inter-firm Rivalry

Porter’s 5 Force – 2/2

INTER-FIRM RIVALRY

Exit barriers; Industry

concentration; Fixed costs

Value added; Industry growth;

Intermittent overcapacity;

Product differences; Switching

costs; Brand identity; Diversity

of rivals; Corporate stakes;

SUPPLIER POWER

Supplier concentration; Importance of volume to supplier; Differentiation of inputs; Impact of

inputs on cost or differentiation; Switching costs of firms in the industry; Presence of substitute

inputs; Threat of forward integration; Cost relative to total purchases in industry;

THREAT OF NEW ENTRANTS

Barriers to Entry; Absolute cost

advantages; Proprietary learning

curve; Access to inputs;

Government policy; Economies of

scale; Capital requirements;

Brand identity; Switching costs;

Access to distribution; Expected

retaliation; Proprietary products;

THREAT OF

SUBSTITUTES

Switching costs;

Buyer inclination to

substitute; Price-

performance trade-

off of substitutes

BUYER POWER

Bargaining leverage; Buyer volume; Buyer information; Brand identity; Price sensitivity; Threat of

backward integration; Product differentiation; Buyer concentration vs. industry; Substitutes

available; Buyers' incentives

Environmental factors internal to the firm usually can be classified as

strengths or weaknesses, and those external to the firm can be classified

as opportunities or threats. Now, try to classify the following cases as

Strength/Weakness/Opportunity/Threat:

a) Patents

b) Strong brand names

c) Good reputation among customers

d) Cost advantages from know-how

e) Easy access to natural resources

f) Favorable access to dist. networks

g) Lack of patent protection

h) Weak brand name

i) Poor reputation among customers

j) High cost structure

k) Lack of access to resources

l) Lack of access to dist. channels

m) Unfulfilled customer need

n) Arrival of new technologies

o) Loosening of regulations

p) Removal of trade barriers

q) Shifts in consumer tastes

r) Emergence of substitute products

s) New regulations

t) Increased trade barriers

SWOT Analysis – 1/2

Strength (a- f) Weakness (g-m)

Opportunity (n-p) S-O Strategy W-O Strategy

Threat (q-t) S-T Strategy W-T Strategy

Answer: Strengths: a to f ; Weakness: g to m;

Opportunity: n to p; Threats: q to t;

Based on the SWOT analysis, you can adopt 4 types of strategies:

• S-O Strategy: Pursue Opportunities that aligns to company‘s strength

• W-O Strategy: Overcome weaknesses to pursue opportunities

• S-T Strategy: Use your strength to mitigate threats

• W-T Strategy: Prevent weaknesses from enhancing threats

SWOT Analysis – 2/2

Generic Strategies

As per Michael Porter, a firm's strengths ultimately falls into one of the two: strategies – cost

advantage and differentiation. By applying these strengths in either a broad or narrow scope,

three generic strategies result: cost leadership, differentiation, and focus. These are called

generic strategies. Obviously, firms following differentiation would be able to

Low Cost Unique Product

Advantage

Leadership Differentiation

Focused Cost

Leadership

Focused

Differentiation

Try to fit the following firms into one of the four

generic strategies:

charge a premium over the others and a

focused differentiator, even more.

Generic Strategies

Low Cost Unique Product Advantage

Cost Leadership Differentiation

Cost Leadership

Differentiation

If a firm selects more than one approach, and fails to achieve, then the firm

might get stuck in the middle without any competitive advantage.

Answer:

Other useful models

A number of models have been developed for use in strategy formulation and

implementation. Here, we will try and understand what these models are and where

to use them

BCG Matrix:

Developed by the Boston Consulting Group, these is used in Resource

Allocation problem

Igor Ansoff Matrix:

This helps us to get clarity in the correct growth strategy to be adopted,

based on the present and future scenarios.

Diamond Framework:

This helps us to understand the National Competitive Advantage for

establishing a particular industry in a country.

Resource Allocation – BCG Matrix – 1/2

The BCG matrix provides a framework for allocating resources among different

business units and allows one to compare many business units at a glance.

Conventional strategic thinking suggests there are four possible strategies for each

High Low Market Share

Stars Question

Cash Cows Dogs

1. Hold – Hold on to your star product with

sufficient resources

2. Harvest – Allocate sufficient resources

to get maximum profits from cash cows

3. Divest – Divest resources from Dogs,

which cannot be converted to Cash

Cows or Question marks

4. Build – Invest heavily in question marks

which can be converted into Stars

If you consider various types of T.V or monitors,

what category will each of these fall into:

LCD 22‖, LCD 19‖, LCD 27‖, CRT Monitor

High Low

Market Share

Stars Question Marks

Cash Cows Dogs

LCD 27‖

LCD 19‖

LCD 22‖

CRT Monitor

Answer

• LCD 19‖, which has been

and is being bought by most of

the users and matured will be

the cash cow

• LCD 22‘, which is being

sought after currently will be

the Star

• LCD 27‖, which is not

affordable by all currently, but

could become a star if the

prices come down or the

purchasing power goes up is a

question mark

• CRT Monitor which has

become outdated and has no

demand is a Dog

We should also note that the same product can

be in different category at different stages of its

life. For e.g., A star, after the market matures will

get converted to a cash cow

Resource Allocation – BCG Matrix – 2/2

Growth Strategies - Igor Ansoff Matrix

Ansoff Matrix helps us to get clarity on the strategy to be adopted, when a firm

plans to expand . Try to fit the following examples into this matrix for a better

understanding of the four growth strategies.

1. Walt Disney, producing animation

movies, opening up theme parks and

vacation properties

2. Pepsi introducing Rs.5 bottles during

2003 Cricket world cup

3. APPLE – from I-Pod, I-pad to I-Mac

4. Domino‘s started in U.S in 1960 and

expanded to Canada in 1983. Today it

is present in 60 countries

Existing New Product

Market

Penetration

New Product

Development

Market

Development Diversification

Existing New Product

Market Penetration New Product

Development

Market

Development Diversification

A company whose strength is

its customer base would go for New

Product Development and sell a

new products to the same customer,

while a company whose strength is

product specific will go for market

development

You may also realize that while market penetration could need least investment

of resources and carries least risk, diversification often requires higher investments

and is the most riskiest growth strategy.

Growth Strategies - Igor Ansoff Matrix

Diamond Framework

Firm Strategy,

Structure and Rivalry

Factor

Conditions

Related & Supporting

Industries

Demand

Conditions

The diamond framework can be used to

illustrate the determinants of national

competitive advantage. In other words, it

explains why an industry thrives in a

particular country.

(You may find out more about these

components yourself)

Example:

1. IT industry in India

2. Fax Machines in Japan

It is important that a company planning

to expand in a particular county ensures

that these factors and the government,

would align and not interfere with its

growth strategy.

Intended v/s Emergent Strategy

Citing Coca-Cola as an example, Daniel Akerson, CEO of General

Motors once told The Wall Street Journal that a GM car was just like the can

of Diet Coke he was drinking during the interview. "GM has to start acting

like a consumer-driven -- not [an] engineering-driven -- company, We sell a

consumer product -- our can just costs $30,000." Akerson had said. The result

was that GMs share price fell by around 33%

The above example is a perfect example of wrong strategy association.

Comparison of two different products, that too by a CEO sent shocking signals to

investors and the result was for everyone to see. What is worse is the fact that

many companies have adopted wrong strategies and miserably gone out of

business, leave alone a successful implementation of the intended strategy.

Hence, one should be ready to adapt/modify the strategy midway. These

emergent strategies have often proved more successful when compared to the

original intended strategy.

Conclusion

There are many examples of failed strategies, probably more in number

than successful ones. Strategy is not some-thing that can be read in a text book

and implemented successfully as explained in it. Every strategy should be unique

and inimitable. It is this inimitability that gives you sustainable growth and

development.

Strategy should be seen, rather, as laying out the general path—but not

the precise steps—an organization will follow to create value. The essence of

being ―strategic‖ thus lies in a capacity for "intelligent trial-and error‖, rather than

linear adherence to finally honed and detailed strategic plans

Why then should we study Strategic Management?

Strategic Management helps you to align your thoughts into a logical

thought process that may help you in coming out with the right strategy. We read

so many examples of successful and failed strategies, that helps us decide

whether our intended strategy has the possibility of succeeding or not.

“Failures don't plan to fail; they fail to plan‖ - Harvey MacKay

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