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Strategic ManagementCourse Facilitator: Bijoy S Guha

Dec 2010

Strategic Management: B S Guha

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Basic Concepts:Strategic Management & Business PolicySyllabus Topic: 1) Introduction to Strategic Management

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Defined: Set of managerial decisions and actions that determines the long-run performance of a firm.The primary role of corporate management is finding the future ... Al ReisDec 2010 Strategic Management: B S Guha 3

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Defined: General management orientation that looks inward for properly integrating the firms functional activities.

Strategic Management: B S Guha Dec 2010

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Basic financial planning: serious planning fornext years budget limited horizon;

Forecast-based planning: many programs runbeyond a year; managers look at longer time horizons, typically 5 years, but much ad-hocism in forecasts;

Externally-oriented planning (strategic): accenton reliable forecasts and centralized formulation of strategic actions;

Strategic management: inclusion ofimplementation and control in strategic actions; involvement of all levels for realism and buy-in.Strategic Management: B S Guha 5

Dec 2010

Highly Rated Benefits: Clearer sense of strategic vision for the firm

Sharper focus on what is strategically important Improved understanding of a rapidly changing

environment

Not always a formal process:

Where is the organization now? (Not where do we hope it is!) If no changes are made, where will the organization be in 1 year, 2 years, 5 years, 10 years? What specific actions should management undertake? What are the risks and payoffs involved?Strategic Management: B S Guha 6

Dec 2010

Strategic grid

HHigh Intuitive based strategyHigh Logic , High Intuition strategy

Intuition

Compromise strategy

Negligible strategy

High Logic based strategy

Dec 2010


Logic

H

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Globalization

Internationalization of markets and corporations Global (worldwide) markets rather than national markets

Electronic Commerce

Use of the Internet to conduct business transactions Basis for competition on a more strategic level rather than

traditional focus on product features and costsStrategic Management: B S Guha 8

Dec 2010

7 Trends:

Internet forcing companies to transform themselves Market access and branding are changing, causing disintermediation of traditional distribution channels Balance of power shifting to the increasingly savvy consumer Competition is changing (convergence!) Pace of business increasing drastically Internet purchasing corporations out of their traditional boundaries Knowledge becoming a key asset and source of competitive advantageStrategic Management: B S Guha 9

Dec 2010

Strategic flexibility:

Demands a long-term commitment to the development and nurturing of critical resourcesDemands that the firm become a learning organization

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Defined: An organization skilled at creating, acquiring, and transferring knowledge and at modifying its behavior to reflect new knowledge and insights. Four Main Activities:

Solving problems systematically Experimenting with new approaches Learning from their won experiences and that of others Transferring knowledge quickly and efficiently throughout the organizationStrategic Management: B S Guha 11

Dec 2010

Four Basic Elements

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Defined: The monitoring, evaluating, and disseminating of information from the external and internal environments to key people within the firm.

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Identify strategic factors

SWOT Analysis Strengths, Weaknesses Opportunities, Threats

Internal Environment Strengths & Weaknesses Within the organization but not subject to short-run control of management

External Environment Opportunities & Threats External to the organization but not subject to short-run control of management

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Defined: Development of long-range plans for the effective management of environmental opportunities and threats in light of corporate strengths and weaknesses.

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Mission Statement

Purpose or reason for the organizations existence Promotes shared expectations among employees Communicates public image important to stakeholders Who we are, what we do, what wed like to become

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A goal is an open-ended Objectives statement of what one wants The end results of planned activity to accomplish with no quantification of What is to be accomplished what is to be achieved and no time criteria for Time in which to accomplish it completion.

Quantified when possible

Corporate goals and objectives include:Profitability (net profits) Growth (increase in total assets, etc.) Utilization of resources (ROE or ROI) Market leadership (market share)Dec 2010 Strategic Management: B S Guha 18

Defined: A strategy of a corporation forms a comprehensive master plan stating how the corporation will achieve its mission and objectives. It maximizes competitive advantage and minimizes competitive disadvantage.


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Defined:

Broad guidelines for decision making that link the formulation of strategy with its implementation.


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ProgramsStrategy Implementation

BudgetsProcedures

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Strategic Management Model

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New CEO External intervention

Triggering event

Threat of change in ownershipPerformance gap

Stimulus for change in strategy

Strategic inflection point


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Inflection Point The four phases of Business: Starts with the introduction of a product/service, Obtains a market position through R&D/ Range extensions/

Improvements, Establishes dominance through Customer Satisfaction/ Technology/ positioning strategies, Shrinks with influx of innovations/changing Customer needs/ environmental conditions. Dynamics of StrategySteel Automotive Telecom. Bio-Tech.

Point of Inflection+ Clothing

Textile

Dec 2010

Introduction


Growth

Maturity

Decline 24

3 Types of Strategy

Corporate strategy Business strategy

Functional strategyStrategic Management: B S Guha 25

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Corporate StrategyBusiness (Division Level) Strategy

Functional Strategy

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Strategic Decisions Rare: seldom have precedents Consequential: commit great deal of

resources and demand high degree of commitment from people Directive: set the tone for further decisions and actionsDec 2010 Strategic Management: B S Guha 27

Mintzbergs ModesEntrepreneurial mode: made by a powerful individual, with opportunities as the primary focus and problems secondary. Characterized by founders vision and bold, large decisions for growth. Adaptive mode: characterized by reactive, fragmented solutions to existing problems more than proactive search for opportunities. Planning mode: characterized by data-collection, analysis and logical selection. It is both proactive & reactive. Logical incrementalism: combines all the above and is both intraprenureal and top-led, allowing for both vision and experimentation to thrive.Dec 2010 Strategic Management: B S Guha 28

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Strategic Decision Making

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ENVIRONMENTAL SCANNING & BUSINESS STRATEGYSyllabus Topics: (6) Process of Strategy Formulation (2) Competitive Strategy , (5a) Recent advances: core competencies (7a)Analytical framework for strategy formulation: Input stage matricesDec 2010 Strategic Management: B S Guha 34

Environmental uncertainty: The degree of complexity plus the degree of change existing in an organizations external environment.Dec 2010 Strategic Management: B S Guha 35

Environmental scanning: The monitoring, evaluating, and disseminating of information from the external and internal environments to key people within the corporation to avoid strategic surprise and ensure the long-term health of the firm.Dec 2010 Strategic Management: B S Guha 36

External Environmental Variables: Societal environment: General forces that do not directly touch on the short-run activities but often influence its long-run decisions. Task environment: Those elements or groups that directly affect the corporation and, in turn, are affected by it. The task environment is the industry within which that firm operates.Dec 2010 Strategic Management: B S Guha 37


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Issues Priority MatrixProbable Impact on Corporation High Medium Low

High Priority Probability of Occurrence

High Priority

Medium Priority

High Priority

Medium Priority

Low Priority

Medium Priority

Low Priority

Low Priority

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External Strategic FactorsDefined: Key environmental trends that are judged to have both a medium to high probability of occurrence and a medium to high probability of impact on the corporation.

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Societal Environment Important VariablesEconomicGDP trendsInterest rates Money supply Inflation rates

TechnologicalTotal government spending for R&DTotal industry spending for R&D Focus of technological efforts Patent protection New products New developments in technology transfer from lab to marketplace Productivity improvements through automation

Political-LegalAntitrust regulationsEnvironmental protection laws Tax laws Special incentives Foreign trade regulations Attitudes toward foreign companies

Socio-culturalLifestyle changesCareer expectations Consumer activism Rate of family formation Growth rate of population Age distribution of population

Unemployment levelsWage/price controls Devaluation/revaluation Energy availability and cost Disposable and discretionary income

Laws on hiring and promotionStability of government

Regional shifts in populationLife expectancies Birth rates43

Dec 2010


Societal Environment Strategists must monitor the major forces and their interactive effects, for their opportunity and threat potential:Example of interactive effects: explosive population growth (demo-graphic) leads to more resource depletion and pollution (natural) which, in-turn, Dec 2010

leads consumers to call for more preventive laws (political-legal). This could stimulate new solutions and products (technological), which if they are affordable (economic) may actually change attitudes and behaviours (socio-cultural).Strategic Management: B S Guha 44

External Strategic FactorsFactors influencing the choice:Personal values of managers Functional experience of managers Success of current strategies Strategic myopia

Willingness to reject unfamiliar as well as negative

information

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Industry analysis: An in-depth examination of key factors within a corporations task environment.

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IndustryA group of firms producing a similar product or service, such as soft drinks, Automobiles or financial services. The principal determinant of the Task Environment is the Industry Analysis: What is the structure of the industry in which the

business unit operates? How should the business unit exploit the industry structure? What will be the basis of the business units competitive advantage?Dec 2010 Strategic Management: B S Guha 47

Porters approach: Assess the six forces - Threat of new entrants Rivalry among existing firms Threat of substitute products Bargaining power of buyers Bargaining power of suppliers Relative power of other stakeholders

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Threat of New Entrants -Barriers to entry:

Economies of Scale Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Size Government Policy

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Rivalry Among Existing Firms -Intense rivalry related to:

Number of competitors Rate of Industry Growth Produce or Service Characteristics Amount of Fixed Costs Capacity Height of Exit Barriers Diversity of Rivals

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Threat of Substitute Products/ServicesSubstitute Products: Those products that appear to be different but can satisfy the same need as another product. To the extent that switching costs are low, substitutes can have a strong effect on an industry. E.g. Entertainment Industry: T20 vs. Movies

Dec 2010


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Bargaining Power of Buyers -Buyer is powerful when:Buyer purchases large proportion of sellers products Buyer has the potential to integrate backward Alternative suppliers are plentiful Changing suppliers costs very little Purchased product represents a high percentage of a buyers costs Buyer earns low profits Purchased product is unimportant to the final quality or price of a buyers products

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Bargaining Power of Suppliers -Supplier is powerful when: Supplier industry is dominated by a few companies but

sells to many Its product is unique and/or has high switching costs Substitutes are not readily available Suppliers are able to integrate forward and compete directly with present customers Purchasing industry buys only a small portion of the suppliers goods.

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Industry EvolutionFragmented Industry No firm has large market share and each firm serves only a small piece of the total market in competition with others.

Consolidated Industry Dominated by a few large firms, each of which struggles to differentiate its products from the competition. Multi-domestic/International GlobalDec 2010 Strategic Management: B S Guha 55

Continuum of International IndustriesMulti-domesticIndustry in which companies tailor their products to the specific needs of consumers in a particular country. Retailing Insurance Banking

GlobalIndustry in which companies manufacture and sell the same products, with only minor adjustments made for individual countries around the world. Automobiles Tires Television sets

Industry primarily multi-domestic or primarily global based on:

Pressure for coordination Within the multinationals in that industry

Pressure for local responsivenessDec 2010

Individual country markets


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Strategic GroupsDefined: A set of business units or firms that pursue similar strategies with similar resources.

Strategic TypesDefined: Category of firms based on a common strategic orientation and a combination of structure, culture, and processes consistent with that strategy.Dec 2010 Strategic Management: B S Guha 57

Strategic groupsCan be mapped by selecting broad characteristics that differentiate companies in an industry and plotting them on two lowly correlated dimensions to understand strategic (competitive) issues and business models.HighRestaurants in 5-star Hotels KFC McDonalds etc. Tapris, Etc. Low SmallDec 2010

Price

Speciality Restaurant

Multicusine Restaurant

Another dimension e.g. Service quality can be added to convert this into a 3-D plot.

Large

Product-line breadthStrategic Management: B S Guha 58

Strategic TypesDefenders: Companies with a limited product line; focus on improving efficiency of current operations Prospectors: Companies with fairly broad product lines; focus on product innovation and market opportunities. Analyzers: Corporations that operate in at least two different product-market areas one stable/ other variable. Reactors: Corporations that lack a consistent strategystructure-culture relationship.Dec 2010 Strategic Management: B S Guha 59

Industry Matrix: Understanding Key Success FactorsKey Success Factors 1

Weight2

Company A Rating 3

Company A Weighted Score 4

Company B Rating 5

Company B Weighted Score 6

Competitive Intelligence!

Total

1.00

Source: T. L. Wheelen and J. D. Hunger, Industry Matrix. Copyright 2001 by Wheelen and Hunger Associates. Reprinted by Dec 2010 Strategic Management: B S Guha 61 permission.

Forecasting Techniques:

Extrapolation Brainstorming Expert opinion Statistical modeling Scenario writing

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External Factor Analysis Summary (EFAS)External FactorsOpportunities 1 Weight 2 Rating 3

Weighted Score4

Comments 5

RankedThreats

8 to 10, prioritized

Max: 5 on how well the company is currently dealing with factor1.00

Total Weighted Score

Notes: 1. List opportunities and threats (510) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factors probable impact on the companys strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the companys response to that factor. 4. Multiply each factors weight times its rating to obtain each factors weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is responding to the strategic factors in its external environment. Source: T. L. Wheelen and J. D. Hunger, External Strategic Factors Analysis Summary (EFAS). Copyright 1991 by Wheelen and Hunger Associates. Reprinted by permission. Dec 2010 Strategic Management: B S Guha 63

External Factors

Weight

Rating

Weighted Score

Comments

Opportunities Economic integration of European Community Demographics favor quality appliances Economic development of Asia Opening of Eastern Europe Trend to Super Stores

1.20 .10 .05 .05 .10 .10 .10 .15 .05 .10

24 5 1 2 2 4 4 3 1 2

3.80 .50 .05 .10 .20 .40 .40 .45 .05 .20

4Acquisition of Hoover Maytag quality

5

Threats Increasing government regulations Strong U.S. competition Whirlpool and Electrolux strong globally New product advances Japanese appliance companies

Low Maytag presence Will take time Maytag weak in this channel Well positioned Well positioned Hoover weak globally Questionable Only Asian presence is Australia

Total Scores

1.00

3.15

Dec 2010


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Internal Strategic Factors: Critical Strengths and Weaknesses that are likely to determine if the firm will be able to take advantage of opportunities while avoiding threats. Resources: A resource is an asset, competency, process, skill or knowledge controlled by the corporation. A resource is: Dec 2010

a strength if it provides a firm with competitive advantage; a weakness if it is something the company is not sufficiently endowed with respect to the competitorsStrategic Management: B S Guha 65

Barneys VRIO framework for evaluating a firms key resources: Value: does it provide competitive advantage? Rareness: do other competitors posses it? Imitability: is it costly for others to imitate? Organization: is the firm organized to exploit the resource? An answer yes for a particular resource indicates a strength and a distinct competence. Analysis is derived from:Dec 2010

Companys past performance Companys key competitors Strategic Management: B S Guha The industry as a whole

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Using resources to gain competitive advantage is a 5-step process:1. Identification & classification of a firms resources as strengths & weaknesses; 2. Combining the firms strengths into specific capabilities. Corp. capabilities (Competencies) are things that the firm does exceedingly well. 3. Appraisal of the Profit Potential, in terms of sustainable competitive advantage, of these resources. 4. Selection of the strategy that best exploits the firms capabilities in relation to the (external) opportunities. 5. Identification of resource-gaps and investment in Dec 2010 upgrading weaknesses Strategic Management: B S Guha 67

Sustainability is characterized by: Durability: the rate at which the firms capabilities (competencies) depreciate or become obsolete; Imitabilty: the rate at which the firms capabilities (competencies) can be duplicated by others. The Corp. Competencies can be imitated to the extent that they are: Transparent: the speed with which other firms can understand the relationship between resources and capabilities and their exploitation; Transferable: the ability of the competitors to gather the resources and generate capability; Replicable: the ability of competitors to use the duplicated resources to imitate the champions success.Dec 2010 Strategic Management: B S Guha 68

Hard to imitate

Level of Resource Sustainability Std. Cycle Resources Mass Production Scale, complex process e.g. DTSI Engine

Easy to imitate

Slow Cycle Resources Strongly shielded Patents, Brands e.g. Gillette Sensor

Fast Cycle Resources Easily duplicated idea driven e.g. SONY Walkman

Dec 2010

A core competency is a specific factor that a business sees as being central to the way it, or its employees work. It fulfils three key criteria: It provides consumer benefits It is not easy for competitors to imitate It can be leveraged widely to many products and markets.Strategic Management: B S Guha

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Competencies are easy to acquire if they come from explicit knowledge: Since readily articulated and communicated, this knowledge is easily acquired by commercial intelligence;

Core Competencies come from tacit knowledge (or knowing): Not easily communicated or imitable since they come from shared knowledge i.e. deeply rooted in experiences and corporations culture; Often they are not very formalized or are derived from a complex web of elements which cannot be distinctly defined by the management; Top management Strategic Management: B S Guhato intervene! (dont fix70 are very reluctant Dec 2010 it if it aint broke)

Core CompetencePrahalad & Hamel introduced this term in their paper The Core Competence of the Corporation (HBR, 1990). In highlight: CC represents the collective learning and coordination capabilities/skills behind the firms manifest product lines CC leads to the development of core products which in turn spawn a host of end-user products/services The core products are not traded and thus lead to sustainable competitive advantage. Business Units tap into the core to deliver the market-beating end products The intersection of market opportunities with the CC forms the basis of launching new products Without CC, a corporation is just a collection of discreet businesses It is not necessarily expensive to develop CC since it is more about coordination rather than elaborate R&D, vertical integration etc. Dec 2010 Strategic Management: B S Guha 71

Core Competence ctd To be world-class, a company must identify and build on a few core competencies, precisely, what is it? Honda, for example, has a core competence in small engine design and manufacturing (core product): manifest in multiple products; Sony has a core competence in miniaturization (core process), leading to many firsts e.g. Transistor Radio; Walmart has a core competence in logistics & SCM (core service) leading to outstanding variety on offer at lowest cost. Typically, a core competence refers to a set of skills or experience in some activity, rather than physical or financial assets.Strategic Management: B S Guha Dec 2010 72

Core Competence ctdStrong core competencies: are well-organized special skills, technologies, processes, knowledge, expertise, or abilities. are typically achieved by long-term development processes and experiences. create customer value because they are considered by your customers to be unique and distinguishable, and they are not equally accessible to all competitors. are extremely difficult for other companies to imitate, if they can at all. can be transferred to other marketsDec 2010 Strategic Management: B S Guha 73

The Business Organization Model: Value ChainFirm Infrastructure Human Resource Management Technology Development Procurement

(Porter,1985)

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Service

Primary ActivitiesDec 2010 Strategic Management: B S Guha 75

Value Chain Analysis: Examination of each product/service lines core competencies and core deficiencies Examination of the linkages between the value-elements: the value/cost trade-offs and interactive effects E.g. using Brand Ambassadors may improve marketing but make a dent in the budget allocation for technological development initiatives in e-marketing.

Finding synergies across product-lines and businesses to gain Economies of ScopeDec 2010

E.g. use of common distribution channel by Unilever for the wide variety of product/business lines: Personal care, Hygiene & CookeryStrategic Management: B S Guha

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Internal (organization) AnalysisActivities in the value are formally grouped into departments in and arranged to show reporting relationships i.e. Organization Structure. The most common types are: Simple Structure (Stage I) Entrepreneur Decision making tightly controlledEntrepreneur/ Owner

Little formal structure Planning short range/reactive Flexible and dynamicDec 2010 Strategic Management: B S Guha 77

Sr. Manager

Jr. Manager

Internal (organization) Analysis Functional Structure (Stage II) Management team Functional specialization Delegation decision making

Concentration/specialization in industry

Divisional Structure (Stage III) Diverse product lines Decentralized decision making SBUs Independent resource allocations

Dec 2010


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Functional StructureManaging Director

Divisional StructureC.E.O

Operations DirectorProduction Manager Materials ManagerDec 2010

Marketing DirectorSales Manager Logistics Manager

Finance Director

C.O.O Publishing Technical Manager Marketing Manager

C.O.O Fin. Serv. Operations Manager Finance Manager

C.O.O Exports


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Divisional Structure: MatrixedC.E.O C.O.O Publishing Technical Manager Finance ManagerDec 2010

C.O.O Fin. Serv. Operations Manager Finance Manager

C.O.O Exports Finance Manager

C.F.OManager Fin Control Manager Treasury80

Marketing Manager


The evolving Value ChainCorporate Support ActivitiesIn Logs.Out Manf. Logs.Out

R&D(Swn)

Co.

I.T.(TelCo)

In Logs. Manf. Logs. Sales

Mkt &

Mkt & SalesServ.

Engg. Serv.(India)

Mkt. Logs Sales* Serv*.* O/sourced in major Mkts

Manf.

(Vam) (L/Co) cloned Multi-location Activities

Customers

Typical multi-domestic Organization: 20th Century Overseas operations characterized by rigid business systems with equity links.Dec 2010

Typical Global Organization: 21st Century Networked functions/activities, out-sourced with key control levers in hand: partnerships/ service level agreements81


Network StructurePackagers Designers Corporate Headquarters (Broker) Manufacturers Promotion/ Advertising AgenciesDec 2010 Strategic Management: B S Guha 82

Suppliers

Distributors

Impact of Corporate Culture : Definition is the collection of beliefs, expectations and values learned and shared its members, transmitted from one generation of employees to another

This is who we are, what we do and what we stand for Has two attributes, shaping behaviours and influencing strategy: Intensity: degree of acceptance of norms, manifest in acceptance of sub-cultures within each unit the depth of culture: leading to shared value e.g. Tata Motors Integration: commonality across the lines of business/units, manifest in an all-pervasive culture the breadth of culture: Strategic Management: B S Guha 83 leading to consistent behaviours e.g. Army

Dec 2010

Corporate Culture fulfills several important functions in an organization: Conveys a sense of identity for employees Helps generate employee commitment to something greater than themselves Adds to the stability of the organization as a social system Serves as a frame of reference for employees to use to make sense out of organizational activities As a guide to appropriate behaviour

Culture strongly influences behaviour and can significantly affect a firms ability toDec 2010 Strategic Management: B S Guha

84

Marketing:Primary link to Customers & CompetitionPositioning: Who are our Customers?Segmentation: Niches, new products & USPs?

Marketing Mix: 4Ps to use to for gaining competitive advantage Links & leverages vis--vis costs

Product Life-cycle considerationsDec 2010 Strategic Management: B S Guha 85

Financial: Funds - Source, Use & Control? Capital Structure: Leverage (debt/asset ratio)? High is good with upswings, low under recession & downswings

Capital Budgeting: Return on Capital: Shareholders value Hurdle rates for Project Pay-back and ProfitabilityDec 2010 Strategic Management: B S Guha 86

Research & Development: apt technology to support Objectives & Mission i.e. short & long terms R&D Intensity: R&D Spend as %age revenue to keep abreast/ahead of the industry Risks: appraisal and mitigation Make or Buy? Technology transfer issues

R&D Mix: Fundamental Research, Product & Process Development Adjusted to a products position in the life-cycle Technological Discontinuity: S-CurvesDec 2010

From incremental improvements to Factoring in Strategic Management: B S Guha major break-throughs

87

Operations: must meet/better the Q-C-T requirements of business, consistently: Set-ups & systems: geared to the nature of demand: High-volume/Low variety Or Lowvolume/High variety Experience Curve: Costs decrease with cumulative units made industry norms Mass Customization: combining economies of scope and scale Lean manufacturingDec 2010

Intermittent systems, e.g. Job-shops Continuous systems, e.g. robotized assembly lines

Estimating/cost-projections for start-ups Guideline for target setting

CAD/CAM Flexible manufacturing systems

Strategic Management: JIT, TPM and allied systems B S Guha

88

H.R.M: towards flexibility and dynamism to support the business needs Teams: with mature and knowledgeable workforce Self-managed teams Cellular, cross-functional groups Concurrent Engineering Flexi-time & Work from home

Currency: to keep-up with skill/knowledge demands Contracting, Part-time & job-sharing, restructuring T & D of core staff :Employability Diversity: fairness, equal opportunity employment, cultureStrategic Management: B S Guha

Dec 2010

89

M.I.S: enabling improved decision making and information flow Rapid changes in IT: life-cycle cost issues Developments in B2B & B2C Inter-organizational integration: supplier-partners Emphasis on knowledge development

Virtualization of organization Flatter structures with increased coordination needsDec 2010

Increasing employee independence & participation in


90

Scan

The internal organizational environment Departments/functions, competencies

Factors for their particular business Identify Benchmark: use VIRO framework Capture the high impact/consequence factors Prioritize Rank for relative importance by weightingDec 2010 Strategic Management: B S Guha 91

Internal FactorsWeight Strengths 1 2 Rating 3

Weighted Score4

Comments 5

Experienced top management Vertical Integration Current Asset Management Distribution Network International Orientation Global Positioning Product Portfolio Employee relations Manf. facilities R&D

0.05 0.05 0.15 0.10 0.15 0.15 0.15 0.05 0.10 0.051.00

Weaknesses

2.5 2.0 4.0 3.5 3.5 3.5 4.0 2.5 2.0 2.0

Total Weighted Score

0.13 0.10 0.60 0.35 0.52 0.53 0.60 0.13 0.20 0.10 3.266

Industry knowledge Component manufacture Inventory control system Dedicated dealers Growing supply SE Asia Brand name unattractive Domestic segment focus Health & safety concerns Old plant & m/cs Speed

Notes: 1. List strengths and weaknesses (510) in column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factors probable impact on the companys strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the companys response to that factor. 4. Multiply each factors weight times its rating to obtain each factors weighted score in Column 4. 5. Use Column 5 (comments) for rationale used for each factor. 6. Add the weighted scores to obtain the total weighted score for the company in Column 4. This tells how well the company is responding to the strategic factors in its internal environment. Source: T. L. Wheelen and J. D. Hunger, Internal Strategic Factors Analysis Summary (IFAS). Copyright 1991 by Wheelen and Hunger Associates. Reprinted by permission.

Dec 2010


92

P

Environmental Scanning ExternalMissionReason for

Strategy Formulation

Societal Environment General Forces Task Environment Industry Analysis

existence

Objectives What results to get & when

StrategiesPlan to achieve the mission & objectives

Policies Broad guide to decision making

InternalStructure Chain of Command Culture Beliefs, Expectations, Values Resources Assets, Skills Competencies, Knowledge

Dec 2010


93

Situational AnalysisStrategy formulation:

Strategic planning or long-range planning: develops mission, objectives, strategies and policies Process of finding a strategic fit between external opportunities and internal strengths while working around external threats and internal weaknesses.Strategic Management: B S Guha 94

Situational Analysis:

Dec 2010

S W O T analysis is the most common and enduring tool to determine the fit arising from the current situation. Must identify the distinctive competencies that can be used to make best use of opportunities Also identify the lack of resources leading to under exploitation of the opportunities

Broadly speaking, Strategic Alternative is the ratio Opportunity divided by (Strength minus Weakness). Important issue: Should one invest more in strengths to make them more robust or improve on weaknesses to at least competitive levels?Dec 2010 Strategic Management: B S Guha 95

S W O T analysis does not provide a complete answer or direction: It can generate a lengthy list Does not assign priorities

Uses language which can be ambiguous or interpretative Opinion based difficult to substantiate or verify The same factor might show up two categories Lack of supportive analysis for action plans There is no logical link to strategy implementationDec 2010 Strategic Management: B S Guha 96

Strategic Factor Analysis Summary Strategic Factors (SFAS)(Select the most important opportunities/threats from EFAS Table & the most important strengths and weaknesses from IFAS Table )1 2 3 4DurationINTERMEDIATE

5

6

SHORT

Weight

LONG

Rating

Weighted Score

Comments

Total ScoreDec 2010 Strategic Management: B S Guha 97

Strategic Factor Analysis Summary (SFAS): Maytag as ExampleDurationINTERMEDIATE

Strategic FactorsSHORT

Weight.10 .10 .10 .15

LONG

(Select the most important opportunities/threats from EFAS, Table and the most important strengths and weaknesses from IFAS, Table) S1 S3 Quality Maytag culture (S) Hoovers international orientation (S)

Rating5 3 2 2

Weighted Score.50 .30 .20 .30

CommentsQuality key to success Name recognition High debt Only in N.A., U.K., and Australia

X X X

W3 Financial position (W) W4 Global positioning (W) O1 Economic integration of European Community (O)

.10.10 .10 .15 .10

45 2 3 2

.40.50 .20 .45 .20 X X X

X X

Acquisition of Hoover Maytag quality Weak in this channel

O2 Demographics favor quality (O)O5 Trend to super stores (O + T) T3 T5 Whirlpool and Electrolux (T) Japanese appliance companies (T)

Dominate industryX Asian presence

Total ScoreDec 2010

1.00

3.0598


SWOT analysis & TOWS Matrix

Dec 2010


99

Situational AnalysisNiche:

A need in the marketplace that is currently unsatisfied.

Goal for the Corporation

Find a propitious niche An extremely favorable niche

Strategic window Unique market opportunity available for a limited time

Dec 2010


100

Business Strategy:Focuses on improving the competitive position of a companys or business units products or services within the specific industry or market segment that the firm serves.

Dec 2010


Porters Competitive Strategies Competitive Strategy: Low cost?

Differentiation? Compete head to head in large

market? Focus on niche?Dec 2010 Strategic Management: B S Guha 102

Generic Competitive Strategies: Lower cost strategy Design, produce, market more efficiently than competitors

Differentiation strategy Unique and superior value in terms of product quality, features, serviceDec 2010 Strategic Management: B S Guha 103

Generic Competitive Strategies

Dec 2010


104

Cost Leadership: Low-cost

competitive strategy Aimed at broad mass market Aggressive construction of efficientscale facilities Cost reductions Cost minimizationDec 2010 Strategic Management: B S Guha 105

Differentiation: Broad

mass market Unique product or service Charge premiums Lower customer sensitivity to price

Dec 2010


106

Cost focus: Low

cost competitive strategy Focus on particular buyer group or market Niche focused Seek cost advantage in target market

Dec 2010


107

Differentiation focus: Focus

on particular group or geographic market Seek differentiation in targeted market segment Serve special needs of narrow target marketDec 2010 Strategic Management: B S Guha 108

Stuck in the middle: No

competitive advantage Below-average performance

Dec 2010


109

Requirements for Generic Competitive strategyStrategy Skills & Resources Organizational Requirements

Cost Leadership

Access to capital for sustained investment Process Engineering High supervision Design for assembly Low distribution cost Strong Marketing skill Product Engineering R&D, creativity Reputation & tradition Channel partnership Above focused at target

Tight cost control Frequent, detailed reporting Structured organization & jobs Target based incentive plans

Differentiation

High coordination within depts. Subjective measurements & incentives Skill & knowledge based hiring Creativity prized Above with Niche/Customer focus110

FocusDec 2010


Risks of Generic Competitive StrategiesRisks of Cost Leadership Cost leadership is not sustained: Competitors imitate. Technology changes. Other bases for cost leadership erode. Proximity in differentiation is lost. Cost focusers achieve even lower cost in segments. Risks of Differentiation Differentiation is not sustained: Competitors imitate. Bases for differentiation become less important to buyers. Cost proximity is lost. Differentiation focusers achieve even greater differentiation in segments. Risks of Focus The focus strategy is imitated: The target segment becomes structurally unattractive: Structure erodes. Demand disappears. The segments differences from other segments narrow. The advantages of a broad line increase. New focusers sub-segment the industry.111

Dec 2010


Influence of Industry Structure

Consolidated IndustryMature industry dominated by a few large companies Cost Leadership or Differentiation predominateDec 2010

Fragmented IndustryMany small and mediumsized local companies compete for small shares of total market Focus strategies predominate


112

Strategic rollup: developed in the 90s to quickly consolidate fragmented industry Money from venture capital Entrepreneur acquires hundreds of owner-

operated firms Creates large firm with economies of scale & scope, brings in higher managerial proficeiency Differ from Conventional M &As Large number of firms Owner-operated firms Goal to reinvent entire industryDec 2010 Strategic Management: B S Guha 113

Generic Strategy DynamicsLowest CostLowest Price every day WALMART

Lowest Cost

The current mantra And Jack Welch: No1 or No2 in chosen line of Business

Its a SONY

Past: Single dimensional Current: Multi dimensionalCar for every purpose, pocket, person GM

Differentiation Features/Differentiation Customization/Focus Dec 2010 Strategic Management: B S Guha

Customization114

Briefly, the predominant strategy drivers over the last 50 years are: 60s: Efficiency Service 70s: (Efficiency) + Quality 80s: (Efficiency + Quality) + Flexibility 90s: (Efficiency + Quality + Flexibility) + Speed 00s: All the above + Sustainability Impact of IT From the hard, tangible measures towards a Hard-soft balanced, dynamic approach. The dominant symbol is +(i.e. and)!! Global From share of market to share of mind! Governance & Social Responsibility for continuityDec 2010 Strategic Management: B S Guha 115

Competitive Strategy: Hyper-competition

It is becoming increasingly difficult to sustain competitive advantage for very long : Stability threatened by short product life cycles New Technologies Convergence: Frequent entry of outsiders Repositioning by incumbents Redefinitions (tactical) of market boundaries

Mergers & Acquisitions

Dec 2010

Challenging the very basis of sustainable competitive advantageStrategic Management: B S Guha

116

Tactic: Specific

operating plan detailing how a strategy is to be implemented in terms of when and where it is to be put into action. Timing tactics Market location tactics

Dec 2010


117

Timing Tactics: First

mover (pioneer)

Reputation as industry leader High profits Sets standards for subsequent products in the industry

Late mover Able to imitate technological advances of

others Keeps R&D costs down Keeps risks down

Dec 2010


118

Market Location Tactics: Offensive

Tactics

Frontal assault Flanking maneuver Bypass attack Encirclement

Guerrilla warfare

Dec 2010


119

Market Location Tactics: Defensive

Tactics

Raise structural barriers Increase expected retaliation Lower the inducement for attack

Dec 2010


120

Used to gain competitive advantage within an industry by working with other firms e.g. Star Alliance (airlines) Friendly competition can raise the industry standard and provide a barrier for entry e.g. Japanese auto firms (70s & 80s)Dec 2010 Strategic Management: B S Guha 121

Collusion: Active cooperation of firms to reduce output and raise prices Explicit (e.g. OPEC) Tacit (e.g. cartels)

Strategic Alliance:Partnership of two or more corporations or business units to achieve strategically significant objectives that are mutually beneficial.Dec 2010 Strategic Management: B S Guha 122

Obtain technology

Access to markets

Strategic Alliance

Reduce financial risk

Reduce political risk Achieve competitive advantageDec 2010 Strategic Management: B S Guha 123

Continuum of Strategic Alliances

Mutual Service Consortia

Joint Venture Licensing Arrangement

Value-Chain Partnership

Weak and Distant

Strong and Close

Source: Suggested by R. M. Kanter, Collaborative Advantage: The Art of Alliances, Harvard Business Review (July-August 1994), pp. 96108.

Dec 2010


124

Igor Ansoffs Product-Market Matrix Is the classical business growth strategy, advocating the sticking to the knitting principle to grow profitably. It is more prescriptive, than analytical. Assumes growth is strategy driven and minimally, if at all, influenced by market forces and business cycles; Profitability is ensured by the learning curve principle. However: Links with the core-competence proposition, through core-product principle e.g. Honda For single-industry firms e.g. Coca-Cola, there is relevance in the concentration prescription.Dec 2010 Strategic Management: B S Guha 125

PRODUCT/ Existing MARKET ExistingMarket Penetration Product Development

New

New

Market Development

Diversification

Dec 2010


126

Ansoffs Product-Market MatrixDiversification Product Development

Revenue

Market Development Market Penetration

TimeDec 2010 Strategic Management: B S Guha 127

Corporate StrategySyllabus Topics: 3) Corporate Strategy, 5) Recent advances, 7b) Analytical framework for strategy formulation: Matching stages

Dec 2010


128

Corporate StrategyHierarchy of StrategyCorporate StrategyBusiness (Division Level) Strategy

What mix of businesses should we be in? How do we ensure profitable growth? How do we support the Growth & Profit objectives?

Functional Strategy

Dec 2010


129

Three Key Issues:What route?

Firms directional strategy Firms portfolio strategy Firms parenting strategy

What lines of Business?What to synergize?

Prentice Hall, 2004 Dec 2010

Chapter 6 Strategic Management: B S Guha Wheelen/Hunger

130 130

Directional Strategy: Three

Grand Strategies:

Growth strategies Stability strategies Retrenchment strategies

Orientation toward growth Expand, cut back, status quo? Concentrate within current industry, diversify

Dec 2010

into other industries? Growth and expansion through internal development or acquisitions, mergers, or strategic alliances? Strategic Management: B S Guha

131

Dec 2010


132

Growth Strategies:Most widely pursued strategies External mechanisms:

Mergers Transaction involving two or more firms in which stock is exchanged but only one firm survives.

Acquisition Purchase of a firm that is absorbed as an operating subsidiary of the acquiring firm.

Strategic Alliance Partnership of two or more firms to achieve strategically significant objectives that are mutually beneficial.Dec 2010 Strategic Management: B S Guha 133

2 Basic Growth Strategies:

Concentration Current product line in one industry Vertical Growth Horizontal Growth

Diversification Into other product lines in other industries

Dec 2010


134

Corporate Strategy ConcentrationVertical growth Vertical integration Full integration Taper integration Quasi-integration

Backward integrationExpansion to other geographical locations and/or increasing range of offeringsDec 2010

Forward integration

Backward Integration: assuming a function previously provided by a supplier. Forward Integration: assuming a function previously provided by a distributor

Horizontal Growth

Horizontal integrationStrategic Management: B S Guha 135

Dec 2010


136

Corporate Strategy Diversification Concentric Diversification Growth into related industry Search for relatedness

Conglomerate Diversification Growth into unrelated industry Concern with financial considerations

Dec 2010


137

Corporate Strategy DiversificationSingle Industry: (Wrigley, Coca Cola)

Degree of Relatedness

Related Diversified: (Unilever, Sony)

Conglomerates: (Tata, GE, Mitsubishi)

Extent of DiversificationDec 2010 Strategic Management: B S Guha 138

Exporting Licensing Franchising Joint Ventures Acquisitions Green-Field Production Sharing Turnkey Operations BOT Concept Management ContractsDec 2010 Strategic Management: B S Guha 139

International Entry Options

Stability Strategies: Pause/proceed with cautionPeriod of stabilization following (rapid) growth Consolidating before the next wave of meaningful opportunities

No changeA stable period in the business cycle with the firm having found a comfortable niche. No threats from new entrants

Profit strategiesRestructuring generate profit by sweeping (often harsh) internal changes; temporary one-shot in nature Reengineering a new approach (even sectored) to business; temporary and may be in sequenced steps140 Strategic Management: B S Guha

Dec 2010

Retrenchment Strategies:

TurnaroundCharacterized by rapid return to profitability, usually in contraction (i.e. cutback in size and costs), followed by consolidation (i.e. stabilization of leaner organization )phases. Usually not sustainable nor desirable for along period of time. Sets the tone for a more radical change e.g. Restructuring and/or Reengineering.

Captive Company Strategyis giving up independence for security; become a supplier to a more dominant company. Usually resorted by poorly competitive and fund-strapped firms. Allows for cost cutting (activity) and better cash flows

Dec 2010


141

Selling outResorted to under uncompetitive and no-fund conditions, but with a buyer in place e.g. Sell-out of Tata Oil Mills (TOMCo) to Hindustan Levers (HLL). In selling out lines of businesses with poor fit or low growth potential, this act is termed Divestment e.g. sell out of Dalda and related brands worldwide (hydrogenated Oil) by Unilever to American Bunge Co.

Bankruptcy/LiquidationBankruptcy means giving up management of the firm to court appointed receivers for settling obligations and extend the life of the firm e.g. General Motors Liquidation implies the termination of a firms activity, wherein assets are sold off to meet the creditors and then the shareholders claims without the intervention of courts (who usually give low priority to shareholders!).

Dec 2010


142

An approach to work out an appropriate strategic intent (choice) Strategic Position & ACtion Evaluation Analysis (SPACE):Competitive AdvantageMarket Share Product Quality Product Life Cycle(position) Customer Loyalty Competitions capacity utilizn. Technology, know-how Vertical Integration

Financial StrengthReturn on Investment Leverage Liquidity Capital required/ capital available Cash flow Ease of exit from market Risk involved in business

Industry StrengthGrowth potential Profit potential Financial stability Resource Utilization Capacity Intensity Ease of entry into the market Productivity, capacity utilzationDec 2010

Environmental StabilityTechnology Changes Rate of Inflation Demand variability Price range of competing products Barriers to entry into market Competitive pressure Price elasticity of demand143


Leading to the Strategic Postures in a matrix: SPACE MATRIXFinancial Strength6

Competitive advantage

FOCUS Conservative

COST LEADERSHIP Aggressive06

Industrial Strength

-6

GAMESMANSHIP Defensive

DIFFERENTIATION Competitive

Arrows indicate increasing Values for the dimension.Dec 2010

Environmental StabilityStrategic Management: B S Guha 144

-6

And associated actions:Financial StrengthStatus QuoRelated Diversification

Competitive advantage

FOCUS Conglomerate Diversification ConservativeDiversification

COST LEADERSHIP Concentration AggressiveVertical Integration

Industrial Strength

Divestment

GAMESMANSHIP Defensive Liquidationa Retrenchment

Mergers/acquisitions (related)

DIFFERENTIATION Competitive Mergers/acquisitions(unrelated) Turnaround

Arrows indicate increasing Values for the dimension.Dec 2010

Environmental StabilityStrategic Management: B S Guha

145

e.g. SPACE matrix for a Bank:Competitive AdvantageData processing for > 450 Customers, c/wide -2 Rapid entry of foreign banks/institutions -5 Large, old Cust. Base -2 -9

Financial StrengthPrimary Capital Ratio 7.23%, >6% avg. RoA 0.77, 80% wealth is with < 20% people:

People in US polled a 50-50 balance is fair

Is the World and Life-style that we take for granted be there forever i.e. Sustain?Strategic Management: B S Guha 174

Dec 2010

Sustainability: viewpoints

Sustain: DICTIONARY

Sustainability

To endure without yielding: withstand To keep up or maintain Synonyms: Aid, Carry, Endure, Keep, Preserve, Support Is being used more in the sense of human sustainability on planet Earth;

The most widely quoted definition is sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.175

Dec 2010


The definition contains two key concepts:

Needs: in particular the essential needs of the worlds poor to which overriding priority should be given Limitations: imposed by the state of technology and social organizations on the environments ability to meet present and future needs for a business enterprise, sustainable development means adopting strategies and activities that meet the needs of the firm and its stakeholders today while protecting, sustaining and enhancing the human and natural resourcesGuha needed for the future. Strategic Management: B S 176

The definition was extended to Business:

Dec 2010

Shifting PrioritiesEconomy

Society

Envmental

Industrial AgeDec 2010 Strategic Management: B S Guha

New Age177

A universally accepted definition of sustainability is difficult because it is expected to achieve many things:

factual and scientific: a clear statement of a specific destination. The simple definition "sustainability is improving the quality of human life while living within the carrying capacity of supporting eco-systems conveys the idea of sustainability having quantifiable limits. call to action: a task in progress or journey, therefore a political process, so some definitions set out common goals and values e.g.The Earth Charter.Strategic Management: B S Guha 178

Dec 2010

The idea of sustainability is age-old; societies over time have learnt to balance social, environmental and economic concerns. At its core, sustainable development is about creating an interactive and appropriate balance between:

Social Equity: i.e. Human rights, peace, justice, gender equity, cultural diversity etc. Environmental protection: referring to natural environment i.e. Air, water, biodiversity, forests, energy etc. Economic development: understanding the limits and potential of economic growth factoring in poverty reduction, responsible consumption, corporate responsibility, employment andS allied themes. Dec 2010 Strategic Management: B Guha 179Dec 2010 Business Sustainability

179

The triple bottom line (abbreviated as "TBL" or "3BL", and also known as "people, planet, profit") captures an expanded spectrum of values and criteria for measuring organizational (and societal) success.

The concept of TBL demands that a company's responsibility lies with Stakeholders not Shareholders. Here, "stakeholders" refers to anyone who is influenced, directly or indirectly, by the actions of the firm. Accordingly, the business entity should be used as a vehicle for coordinating stakeholder interests, instead of maximizing shareholder (owner) profit.Dec 2010 Strategic Management: B S Guha

SustainAbilty180

Triple bottom line score-card means expanding the traditional reporting framework to take into account ecological and social performance in addition to financial performance. "People, planet and profit" clearly describes the triple bottom lines and the goal:

"People" (human capital) pertains to fair and beneficial business practices toward labour and the community and region in which a corporation conducts its business. "Planet" (natural capital) refers to sustainable environmental practices. A TBL endeavor reduces the ecological footprint.

"Profit" is the economic value created by the organisation

after deducting the cost of all inputs, including the cost of the capital tied up.Dec 2010 Strategic Management: B S Guha 181

Case Study: Hindustan LeverCase 15-4; Management Control Systems 12 edn.

Dec 2010 Strategic Management: B S Guha 182

Syllabus Topics 4) Strategy Implementation: Structure, Systems and People

Dec 2010

Strategic Management: B S Guha 183

Strategy ImplementationStrategy Implementation:

Sum total of the activities and choices required for the execution of a strategic plan. Process by which strategies and policies are put into action through programs, budgets, and procedures.

Dec 2010


184

Strategy ImplementationImplementation Process Questions:

Who are the people to carry out the strategic plan? What must be done to align operations with new direction? How is work going to be coordinated?Strategic Management: B S Guha 185

Dec 2010

Strategy Implementation McKinsey, in 1977, commissioned task forces to find out answers , with particular concern with the nature of the relationship between Strategy, structure and management effectiveness. Tom Peters and Robert Waterman led the team for management effectiveness ( = implementation). Their research let them to define 7 S Framework for management, addressing the crucial problem of execution and adaptation.Dec 2010 Strategic Management: B S Guha 186

7-S Framework (McKinsey)STRUCTURE STRATEGY SHARED VALUES SKILLS STYLE SYSTEMS

STAFF

The Happy AtomDec 2010 Strategic Management: B S Guha 187

7-S Framework (McKinsey) Hard Elements: Strategy, Structure & Systems Definable and/or measureable Can be put down on paper

Soft Elements: Shared Values, Skill, Staff & Style Can be felt or sensed but difficult to define or put down on paper. Thus management is more difficult: soft is hard! Explains better why things work (or dont!) in a company.

Real change is a function of these 7 complex elements

Dec 2010


188

7-S Framework (McKinsey) Led to the investigation on management excellence why some (American)companies are so: Excellent companies are brilliant on basics Tools do not substitute for thinking Intellect did not overpower wisdom Analysis did not impede action. They listened to people (customers & employees ) They allowed some chaos in return for quick action and regular experimentation Worked hard to keep things simple in a complex world

Further expanded to 8 attributes for excellenceDec 2010 Strategic Management: B S Guha 189

7-S Framework (McKinsey)1. A bias for action: for getting on with it 2. Close to the customer: learning from people they

3.4.

5.6.

7. 8.

serve Autonomy & entrepreneurship: fostering many leaders and innovators throughout the organization Productivity through people: rank and file the root source of quality and productivity gains Hands on, Value driven: embodied in the statement walk the talk Stick to the Knitting: stay reasonably close to the business they know Simple form, lean staff: more soldiers than generals Simultaneous loose tight properties: core values are fanatically rigid, operations are flexibleStrategic Management: B S Guha 190

Dec 2010

Selecting the Best Strategy:

Most Important criteria

the ability of a proposed strategy to deal with the strategic factors developed in the SWOT analysis the ability of each alternative to meet agreed-on objectives with least sacrifice of resources and negative side effects.

Corporate Scenarios Pro forma balance sheets and income

statements that forecast effects of alternatives on return on investmentDec 2010 Strategic Management: B S Guha 191

Constructing Corporate Scenarios:

Steps in constructing scenarios Use industry scenarios Develop common-size financial

statements Construct detailed pro forma financial statements for each alternative: Best Case (Optimistic) Worst Case (Pessimistic} Probable case (Most likely)Dec 2010 Strategic Management: B S Guha 192

Scenario Box to Generate Pro Forma Statements1 Pr objectionsLast Factor GDP CPI Other Sales units Dollars COGS Adver tising and marketing Inter est expense Plant expansion Dividends Net pr ofits EPS ROI ROE Other Year Historical Average Tr end Analysis O 19 P ML O 19 P ML O 19 P ML Comments

Dec 2010


193

A 'Du-pont" style ReportSales BalanceSheet Capital Turnover2.05 12.793

/ Net Assets6.233

Total Assets11.497

Interest free Liabilities5.264

RONA12.9% 14.8%

x

Sales12.793

Operating Income Income before Tax Margin P&L6.30% 7.20% 809 925 1.103 1.219

Operating expenses11.690 11.573

Other Costs5.854

+Financial Income-294

+Purchased materials5.854 5.728

%

Sales12.793

Dec 2010


194

Attitude Toward Risk:

Risk is composed of: Probability of (success) effective strategy Impact of any strategy Amount of assets committed

Length of time of asset commitment

Conventionally, risk is quantified in terms of Net Present Value of any

Project - in so far as quantification is possible.Dec 2010 Strategic Management: B S Guha 195

Using NPV to assess risk

the variability associated with obtaining different results (e.g. NPV)

NPV200 600 900

Prob.0.3 0.5 0.2

The weighted NPV works out to: 3 E(NPV) = S pi NPVi i=1 = 0.3x200 + 0.5x600 + 0.2x900 = 540

A measure of the risk is the range i.e.

difference between the highest/lowest value i.e. 900 200 = 700Dec 2010 Strategic Management: B S Guha 196

The higher the spread the more the variability and

risk Standard Deviation (s) of the NPV distribution

quantifies this: s = {0.3(200-540)2 + {0.5(600-540)2 + {0.2(900-540)2}250 =

We can now define a coefficient of variation in

which we relate the s to weighted net present value: CV = s/weighted value ; = 250/540 = 0.46 The higher the CV, the higher the risk rankingDec 2010 Strategic Management: B S Guha 197

Process of Strategic Choice:

The evaluation of alternative strategies and selection of the best alternative: Consensus ? Discussion, disagreement Vision Contradictions Solution

Programmed conflict (to avoid consensus trap) Devils Advocate: Identify potential pitfalls and problems with a proposed alternative strategy in a formal presentation. Dialectic Enquiry: two proposals are generated for each alternative using different sets of assumption and/or groups (shadow committees)Dec 2010 Strategic Management: B S Guha 198

Evaluating strategic alternatives:Ability to meet four criteria: Mutual exclusivity: doing one would discard

the other, Success: S.M.A.R.T i.e. must be doable Completeness: taking into account all the foreseen strategic factors Internal consistency: must make sense on its own without contradicting or unduly compromising any key objective/mission/ policyDec 2010 Strategic Management: B S Guha 199

Organizational Life Cycle:

Generic choices decided by the organizations position in its life-cycle Stages:

Dec 2010

Birth Stage Growth Maturity Decline DeathBirth Growth Maturity Decline200 Strategic Management: B S Guha

Stage I

Stage IIGrowth

Stage III1MaturityConcentric & conglomerate diversification

Stage IVDecline

Stage VDeath

PhasePopular Strategies

Birth

Concentration Horizontal in a niche and vertical growth

Profit strategy Liquidation or followed by bankruptcy retrenchment

Likely Structure

Entrepreneur Functional Decentralization Structural dominated management into profit or surgery emphasized investment centers

Dismemberment of structure

Note: 1. An organization may enter a Revival Phase either during the Maturity or Decline Stages and thus extend the organizations life.

Dec 2010


201

Structural Characteristics of Modern CorporationOld Organizational Design One large corporation New Organizational Design Mini-business units & cooperative relationships

Vertical communicationCentralized top-down decision making Vertical integration Work/quality teams

Horizontal communicationDecentralized participative decision making Outsourcing & virtual organizations Autonomous work teams

Functional work teamsMinimal training Specialized job design focused on individual

Cross-functional work teamsExtensive training Value-chain team-focused job design

Dec 2010


202

Matrix Structure:

3 Distinct Phases Temporary cross-functional task forces Product/brand management Mature matrix non structure elimination of in-house business functions Termed virtual organization Useful in unstable environments Need for innovation and quick response composed of cells Self-managing teams Autonomous business units

Network Structure:

Cellular Organization:

Dec 2010


203

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Documents

function previously

factors probable

gain competitive

generic competitive

factors weighted

environmental

sustainable

total weighted