iStrategicManagementiStrategicManagement Bachelor of Construction Management MGT 415 Military influences in strategy Strategos referred to a general in command of an army The art of the general By 450 B.C. it came to mean managerial skill By 330 B.C. it referred to the skill of employing forces to overcome positions to create a system of global governance Carl von Clausewitz tactics(involve) the use of armed forces in the engagement, strategy (is) the use of engagements for the object of war 1838 On War Academic influences in strategy 1911 Scientific management (Taylor) Still in place today (UPS), some consider it micromanaging HBS requires a class in Business Policy in 1912 Adam Smiths invisible hand (the market) gives way to Alfred Sloan (GM CEO from ) concept of the visible handmiddle manager Chester Bernard influential book The Executive argues that managers should pay attention to strategic factors Ronald Coases 1937 article why firms exist (Nobel Prize in economics) and Joseph Schumpters concept of disruptive technologies written in 1942 bring in organizational economics Max Weber warns against bureaucratic organizations but sees a shift toward this way of organizing Recent influences in strategy 1960s (Strategy and structure; Corporate Strategy) 1963 Harvard business conference leads to SWOT analysis BCG founded in 1963 strategy boutique Created the portfolio analysis Stars, dogs, cash cows, question marks 1980s (Porters 5 forces) 1990s (Resource based view of the firm) What is Strategic Management? Strategic Management The process by which the firm manages the formulation and implementation of the plan and the resulting decisions necessary to accomplish desired objectives Roadmap to follow Blueprint for success What is Strategic Management? The process for moving an organization from where it is now, to where it wants to be. Today Vision for the Future Why is strategic management important? Gives everyone specific role for achievement Makes a difference in performance levels Provides systematic approach to uncertainties Coordinates and focuses employees in meeting organization goals What is a Strategy? Strategy A strategy is a declaration of intent, defining where you want to be in the long term. Large-scale, future-oriented plan for interacting with the competitive environment to achieve objectives It is a unique synthesis of features, design, quality, service, positioning and cost. Companys game plan. Framework for managerial decisions Why Strategy? To change, an organization needs Burning Platform Vision Leadership Competitive Advantage Survival Strategic Management What is Competitive Advantage? Every firm should have one or more unique forms of competitive advantage A firms competitive advantage comes from its ability to perform activities more distinctively or more effectively than its rivals. A competitive advantage gives a firm an edge over its rivals. Goal: Having A Unique Strategy If you have the same strategy as your competitors If the strategy is different but is easily copied If the strategy is different but is hard to copy Your strategy is a wash It provides only a temporary advantage It is strong and sustainable In other words, strategy is about: Direction; Where is the business trying to get to in the long-term Markets & scope; Which markets should a business compete in and what kind of activities are involved in such markets? Advantage; How can the business perform better than the competition in those markets? Resources; What resources (skills, assets, finance, relationships, technical competence, facilities) are required in order to be able to compete? Environment; What external, environmental factors affect the businesses' ability to compete? Stakeholders; What are the values and expectations of those who have power in and around the business? In other words, strategy is about: Strategy at Different Levels of a Business Strategies exist at several levels in any organisation - ranging from the overall business (or group of businesses) through to individuals working in it. Corporate Strategy is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the business. Corporate strategy is often stated explicitly in a "mission statement". Business Unit Strategy is concerned more with how a business competes successfully in a particular market. It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc. Operational Strategy is concerned with how each part of the business is organised to deliver the corporate and business-unit level strategic direction. Operational strategy therefore focuses on issues of resources, processes, people etc. Example: Single-Business Firms Example: Multiple Business Firms DEVELOPING STRATEGIES GENERIC STRATEGIES: Cost Leadership vs. Differentiation GENERIC STRATEGIES: Cost Leadership vs. Differentiation ALTERNATIVE DIRECTIONS: Do Nothing Withdrawal Consolidation Market Penetration Product Development Market Development Diversification Related / unrelated ALTERNATIVE DIRECTIONS: Do Nothing Withdrawal Consolidation Market Penetration Product Development Market Development Diversification Related / unrelated ALTERNATIVE METHODS: Internal Development Acquisition Joint Development ALTERNATIVE METHODS: Internal Development Acquisition Joint Development WHAT BASIS? WHAT DIRECTION? HOW? Strategic Management Growth Strategic Management Process Analyzing Current Situation Deciding on Strategies Putting Strategies in Action Evaluating & Changing Strategies Strategic Analysis Strategy Formulation Strategy Implementation Strategy Evaluation Strategic Analysis Starting point in the strategic management process Precedes effective formulation and implementation of strategies Clear goals and objectives permit effective allocation of resources Hierarchy of goals Vision Mission Strategic objectives Managers Scan the environment Analyze competitors General environment Industry environment Strategic Analysis (cont.) Frameworks for analyzing a firms internal environment Strengths Weaknesses Analyzing strengths can uncover potential sources of competitive advantage Intellectual assets are drivers of Competitive advantages Wealth creation Networks and relationships among Employees Customers Suppliers Alliance partners Strategic Analysis (cont.) The process of Strategic Analysis can be assisted by a number of tools, including: PEST Analysis - a technique for understanding the "environment" in which a business operates Scenario Planning - a technique that builds various plausible views of possible futures for a business 5 Porter Forces Analysis - a technique for identifying the forces which affect the level of competition in an industry Market Segmentation - a technique which seeks to identify similarities and differences between groups of customers or users Directional Policy Matrix - a technique which summarises the competitive strength of a businesses operations in specific markets Competitor Analysis - a wide range of techniques and analysis that seeks to summarise a businesses' overall competitive position Critical Success Factor Analysis - a technique to identify those areas in which a business must outperform the competition in order to succeed SWOT Analysis - a useful summary technique for summarising the key issues arising from an assessment of a businesses "internal" position and "external" environmental influences. Strategic Analysis (cont.) Strategic Formulation Successful firms develop bases for competitive advantage Cost leadership Differentiation Focusing on narrow or industry-wide market segments Sustainability Industry life cycle Firms portfolio or group of businesses What business(es) should we be in? How can we create synergies among the businesses? Diversification Related Unrelated Strategic Formulation (cont.) Appropriate entry strategies Sustain competitive advantage in global markets Digital technologies change the way business is conducted Added value Impact on performance Digital technologies can enhance Cost leadership Differentiation Strategic Implementation Informational control Monitor and scan the environment Respond effectively to threats and opportunities Behavioral control Effective corporate governance Interests of managers and owners of the firm Organizational structure and design Organizational boundaries Flexible Permeable Strategic Alliances Develop organization that is committed to Excellence Ethical behavior Strategic Implementation (cont.) Learning organization responsive to Rapid and unpredictable change in todays competitive environments Corporate entrepreneurship and innovation New opportunities Enhance innovative capacity Autonomous entrepreneurial behavior Product champions New ventures and small businesses Major engine of economic growth Recognize viable opportunities Entrepreneurial leadership skills Audit/Brainstorm Internally Externally Alteration/Modification/Improvement Was the strategy effective? Close the loop Strategic Evaluation Model of Strategic Management Process Advantages of Engaging in the Strategic Management Process Provides a Sense of Purpose for a Firm A strategic plan includes a mission statement and a vision statement. The sentiments represented in these statements provide a sense of purpose for a firm. Advantages of Engaging in the Strategic Management Process Aids In Decision Making Having a strategic plan enables the leaders of a firm to ensure that day-to-day decisions fit with the long-term interests of the organization. Advantages of Engaging in the Strategic Management Process Brings Everyone in the Company Together Having a strategic plan encourages everyone in a company to work together to achieve common aims. Advantages of Engaging in the Strategic Management Process Focus On Forward Thinking The planning function forces managers to think ahead and consider resource needs and potential opportunities or threats that the organization may face in the future. Strategic Management Why do we exist? (Mission/Vision) Where are we? (Situational Analysis) Where do we want to be? (Goals/Objectives) How are we going to get there? (Who, Resources, When, Success/Failure) 3 Wives & 1 Husband of Strategic Management Hierarchy of Goals Company vision Mission statements Strategic objectives Hierarchy of Goals Coherence in Strategic Direction Company Vision Massively inspiring/Charts a companys future strategic course Long-term/Defines the business makeup for 5 years (or more) Driven by and evokes passion Fundamental statement of the organizations Values, Aspiration and Goals Challenges and motivates workforce Company vision Arouses strong sense of. organizational purpose Induces employee buy-in Galvanizes people to live. the business Coherence in Strategic Direction Mission statements Purpose of the company Basis of competition and competitive advantages More specific than vision Focused on the means by which the firm will compete Company specific, not generic- as to give a companys identity A companys mission is not to make a profit ! The real mission is always-What will we do to make a profit? More specific than vision Hierarchy of Goals Company vision Mission statements Conveys Who we are?, What we do?, and Where we are now? Basis of competition and competitive advantages Hierarchy of Goals Company vision Mission statements Coherence in Strategic Direction Strategic objectives Operationalize the mission statement Provide guidance on how the organization can fulfill or move toward the higher goals More specific Cover a more well-defined time frame Resolve conflicts that arise Yardstick for rewards and incentives Strategic objectives Timely Realistic Challenging Measurable Appropriate Value of a Well-Conceived Strategic Vision and Mission Crystallizes long-term direction Reduces risk of rudderless decision-making Conveys organizational purpose and identity Keeps direction-related actions of lower-level managers on common path Helps organization prepare for the future The Vocabulary of Strategy Situational Analysis There are two considerations analysis of factors that can affect the future; External Environment (Using 5 Porters Forces Analysis) Internal Environment (Using S.W.O.T Analysis) Components of the External Environmental Analysis Analysis of the External Environments General environment Focused on the future Industry environment Focused on factors and conditions influencing a firms profitability within an industry Competitor environment Focused on predicting the dynamics of competitors actions, responses and intentions General Environment Dimensions in the broader society that influence and industry and the firms within it Industry Environment Set of factors directly influencing a firm and its competitive actions and competitive responses Competitor Environment All of the companies that the firm competes against. Scenario of External Environment General Environment The Economic Segment Inflation rates Interest rates Trade deficits or surpluses Budget deficits or surpluses Personal savings rate Business savings rates Gross domestic product General Environment (contd) The Sociocultural Segment Women in the workplace Workforce diversity Attitudes about quality of worklife Concerns about environment Shifts in work and career preferences Shifts in product and service preferences General Environment (contd) The Global Segment Product innovations Applications of knowledge Focus of private and government-supported R&D expenditures New communication technologies General Environment (contd) The Technological Segment Product innovations Applications of knowledge Focus of private and government-supported R&D expenditures New communication technologies General Environment (contd) The Political/Legal Segment Antitrust laws Taxation laws Deregulation philosophies Labor training laws Educational philosophies and policies General Environment (contd) The Demographic Segment Population size Age structure Geographic distribution Ethnic mix Income distribution Industry Environment; Porters Five Forces Model Threat of new entrants Bargaining power of buyers Bargaining power of suppliers Threat of Substitute products and services Industry Environment (contd); Threat of New Entrants: Barriers to Entry Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected retaliation Industry Environment (contd); Barriers to Entry Economies of Scale Marginal improvements in efficiency that a firm experiences as it incrementally increases its size Advantages and disadvantages of large-scale and small-scale entry Industry Environment (contd); Barriers to Entry (contd) Product differentiation Unique products Customer loyalty Products at competitive prices Capital Requirements Physical facilities Inventories Marketing activities Availability of capital Switching Costs One-time costs customers incur when they buy from a different supplier New equipment Retraining employees Psychic costs of ending a relationship Industry Environment (contd); Barriers to Entry (contd) Access to Distribution Channels Stocking or shelf space Price breaks Cooperative advertising allowances Industry Environment (contd); Barriers to Entry (contd) Cost disadvantages independent of scale Proprietary product technology Favorable access to raw materials Desirable locations Government policy Licensing and permit requirements Deregulation of industries Industry Environment (contd); Barriers to Entry (contd) Expected retaliation Responses by existing competitors may depend on a firms present stake in the industry (available business options) Industry Environment (contd); Barriers to Entry (contd) Industry Environment (contd); Bargaining Power of Suppliers Supplier power increases when: Suppliers are large and few in number Suitable substitute products are not available Individual buyers are not large customers of suppliers and there are many of them Suppliers goods are critical to buyers marketplace success Suppliers products create high switching costs. Suppliers pose a threat to integrate forward into buyers industry Industry Environment (contd); Bargaining Power of Buyers Buyer power increase when: Buyers are large and few in number Buyers purchase a large portion of an industrys total output Buyers purchases are a significant portion of a suppliers annual revenues Buyers can switch to another product without incurring high switching costs Buyers pose threat to integrate backward into the sellers industry Industry Environment (contd); Threat of Substitute Products The threat of substitute products increases when: Buyers face few switching costs The substitute products price is lower Substitute products quality and performance are equal to or greater than the existing product Differentiated industry products that are valued by customers reduce this threat Industry Environment (contd); Intensity of Rivalry Among Competitors Industry rivalry increases when: There are numerous or equally balanced competitors Industry growth slows or declines There are high fixed costs or high storage costs There is a lack of differentiation opportunities or low switching costs When the strategic stakes are high When high exit barriers prevent competitors from leaving the industry Low entry barriers Industry Environment (contd); Interpreting Industry Analyses Unattractive Industry Suppliers and buyers have strong positions Strong threats from substitute products Intense rivalry among competitors Low profit potential Attractive Industry High entry barriers Industry Environment (contd); Interpreting Industry Analyses Suppliers and buyers have weak positions Few threats from substitute products Moderate rivalry among competitors High profit potential Competitor Environment; Competitor Analysis Competitor Intelligence The ethical gathering of needed information and data that provides insight into: A competitors direction (future objectives) A competitors capabilities and intentions (current strategy) A competitors beliefs about the industry (its assumptions) A competitors capabilities Competitor Environment (contd); Competitor Analysis Components Internal Environment S W O T represents; S trengths. W eaknesses. O pportunities. T hreats. A core competence is a well-performed internal activity that is central to a companys competitiveness and viability A distinctive competence is a competitively valuable activity that a company performs better than its rivals A SWOT analysis is a systematic way of looking at the internal and external factors affecting your business. Strengths Opportunities Weakness Threats Factors Internal to Organization Factors External to Organization Strengths Strengths are generally internal those things that you bring to the enterprise that can help it grow and develop successfully Positive tangible and intangible attributes, internal to an organization. They are within the organizations control. Examples are: Education Experience Capital Access to advisors/support systems Weaknesses Like Strengths, Weaknesses are generally internal. Factors that are within an organizations control that detract from its ability to attain the core goal. Which areas might the organization improve? Examples of weaknesses are: Limited experience or education Limited access to needed capital Limited availability of labor, support or professional help Opportunities Opportunities are those things we perceive that will help our business grow. They are outside of our control, but we want to make decisions that allow us to take control of what the opportunity offers. Identify them by their time frames Most opportunities arise from our understanding of the unmet needs or wants in the marketplace. Examples; Unmet customer need or want for a new product or service Opportunity to expand customer service New market openings through product development Changes in market demand that benefit our business Threats External factors, beyond an organizations control, which could place the organization mission or operation at risk. The organization may benefit by having contingency plans to address them if they should occur. Planning can help to reduce the impact of threats Typical threats are: Negative changes in market demand Changes in economic status Changes in customer preferences Entry of a new competitor Changes in regulations and laws SWOT ANALYSIS TABLE STRENGTHS What do we do well? WEAKNESSES What is wrong now? OPPORTUNITIES What possibilities exist? THREATS What can go wrong? What are your advantages? What do you do well? What relevant resources do you have? What do other people see as your strengths? What could you improve? What do you do badly? What should you avoid? Where are the good opportunities facing you? What are the interesting trends you are aware of? Useful opportunities can come from such things as: Changes in technology Changes in government policy Changes in organizational structure Changes in business priorities? What obstacles do you face? What are other companies doing? Is the playing field changing? Is changing technology, trends, directions threatening your position? Could any of your weaknesses seriously threaten your business? Create a Plan of Action What steps can you take? Capitalize on your Strengths Overcome or minimize your Weaknesses Take advantage of some new Opportunities Respond to the Threats StrengthsWeaknesses OpportunitiesS-O strategies [pursue opportunities that are fit to strengths] W-O strategies [overcome weaknesses to pursue opportunities] ThreatsS-T strategies [use strengths to reduce vulnerability to external threats] W-T strategies [establish defensive plan to prevent weaknesses susceptible to external threats] Factors of Internal Environment (Strength & Weaknesses) Company Resources: Capital (cash and liquid assets) People (employees, management) Brand / Image, Reputation Physical Resources Competencies Corporate Culture Relationships with Suppliers / Distributors Customers Shareholders Competitors Publics; Financial Institutions Government Media Interest Groups Employees (internal) Factors of Internal Environment (Strength & Weaknesses) Economic Environment Biz Cycles, Inflation, Unemployment Socio-Cultural Environment Cross-cultural aspects, Demography Political-Legal Environment Government regulations, Agencies Competitive Environment Direct or Indirect Competitors Natural Environment Climate, seasonal cycles, etc. Technological Environment Factors of External Environment (Opportunities & Threats) Simple Rules for SWOT Analysis Be realistic about the strengths and weaknesses of your organization or group. Distinguish between where your organization is today, and where it could be in the future Be specific: Avoid gray areas. Always analyze in relation to your core mission. Keep your SWOT short and simple. Avoid complexity and over analysis Empower SWOT with a logical conceptual framework. Caution! SWOT analysis can be very subjective. Do not rely on it too much. Two people rarely come- up with the same final version of SWOT. Use it as guide and not a prescription. END OF TOPIC; Strategic Management