sm session 4
TRANSCRIPT
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WELCOME TO SESSION 4OFSTRATEGIC MANAGEMENT
S G Raja Sekharan
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Direct Objectives of the course
To introduce to you concepts andmanagement practices at a strategiclevel.
To give you all a hands on experience ofstrategic level thinking that seniormanagers do everyday.
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Indirect Objectives of the course
To improve your learn_ability skillsTo make you think - think long term
To improve your team interaction skills
To build you up for success in life
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WELCOME TO SESSION 4OFSTRATEGIC MANAGEMENT
S G Raja Sekharan
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RECAP OF WHAT WE HAVEDONE LAST WEEK
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The Five Steps of theStrategy Making Process
Select the corporate v is ion,mission, and values(VMV)and the major corporate goalsand ob ject ives.
Analyze the external competitive environment (toidentify opportuni t iesand threats).
Analyze the organizations internal environment (toidentify its strengthsandweaknesses).
Select strategies that: Build on the organizations strengths and correct its weaknesses
in order to take advantage of external opportunities and counter
external threats Are consistent with organizations vision, mission, and values andmajorgoals and objectives
Are congruent and constitute a viable business model
Implement the strategies and evaluate/course correct.
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Macro Analysis of external environmentPest Analysis
A framework that assists inanalyzing the externalenvironment and helpsidentifying the existing
opportunities & threats
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Porters five forces model
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Porters Value
chain helps to
analyzespecificactivitiesthrough which
firms cancreate valueandcompetitive
advantage
This is part of internal analysisof any company
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This weeks agenda
Analyzing companys externalenvironment
Industry lifecycle analysis model
Internal analysis
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ANALYZING ACOMPANYS EXTERNALENVIRONMENT
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The Role of the Externalenvironment
Changes in the forcesin the externalenvironment candirectly impact:
The Five Forces
RelativeStrengths
IndustryAttractiveness
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Two facets of the companyssituation
The industry and the competitiveenvironment in which the companyoperates and the forces acting toreshape that environment;
The companys own market position andcompetitiveness.
http://www.autopulze.com/automobile/bajaj-auto-limited/bajaj-auto-records-its-highest-ever-exports-for-any-month-in-its-history/http://openmarkets.in/2894/hero-doing-great-with-rs-2575-crore-expansion-planshttp://www.autopulze.com/automobile/bajaj-auto-limited/bajaj-auto-records-its-highest-ever-exports-for-any-month-in-its-history/http://www.topnews.in/companies/tvs-motor-company -
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One needs to answer these sevenquestions
1. What are the dominant economic features of theindustry in which the company operates
2. What kinds of competitive forces are industrymembers facing and how strong is each force?
3. What forces are driving changes in the industry andwhat impact will these changes have on competitiveintensity and industry profitability?
http://openmarkets.in/2894/hero-doing-great-with-rs-2575-crore-expansion-planshttp://www.autopulze.com/automobile/bajaj-auto-limited/bajaj-auto-records-its-highest-ever-exports-for-any-month-in-its-history/http://www.topnews.in/companies/tvs-motor-company -
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One needs to answer these sevenquestions
4. What market positions do industry rivals occupywho is strongly positioned and who is not?
5. What strategic moves are rivals likely to make next?
6. What are the key factors for future competitive
success?7. Does the outlook for the industry present thecompany with sufficiently attractive prospects forprofitability?
http://www.autopulze.com/automobile/bajaj-auto-limited/bajaj-auto-records-its-highest-ever-exports-for-any-month-in-its-history/http://openmarkets.in/2894/hero-doing-great-with-rs-2575-crore-expansion-planshttp://openmarkets.in/2894/hero-doing-great-with-rs-2575-crore-expansion-planshttp://www.autopulze.com/automobile/bajaj-auto-limited/bajaj-auto-records-its-highest-ever-exports-for-any-month-in-its-history/http://www.topnews.in/companies/tvs-motor-company -
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Industry Life Cycle Model analyzes the affects ofindustry evolution on competitive forces over time
and is characterized by five distinct life cycle stages
Industry Life Cycle Analysis
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Stages in the Industry Life Cycle
Strength and nature of five forces change as industry evolves
Embryonic stageHigh costs/lowsales/low profitsLittle or no
competitionfocus on productawarenessHave to be easy touse and sampleFocus ondistributionchannelsFocus on perfectingdesign and logistics
DNA mapping
http://www.mun.ca/biology/scarr/4241_RMC_Sequencing.htmlhttp://www.mun.ca/biology/scarr/4241_RMC_Sequencing.htmlhttp://www.manahotels.in/traveller/india/the-rapidly-growing-medical-tourism-in-india.htmlhttp://www.mun.ca/biology/scarr/4241_RMC_Sequencing.html -
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Stages in the Industry Life Cycle
Strength and nature of five forces change as industry evolves
Growth stageLowering ofcosts/increasing salesand profitsIncreasingcompetitionfocus on scaling upoperations manf.,distribution,manpower etc
CAT SCAN
http://www.brianjogrady.com/neurosurgicaltests.htmlhttp://www.brianjogrady.com/neurosurgicaltests.htmlhttp://www.brianjogrady.com/neurosurgicaltests.htmlhttp://www.brianjogrady.com/neurosurgicaltests.htmlhttp://www.brianjogrady.com/neurosurgicaltests.htmlhttp://www.brianjogrady.com/neurosurgicaltests.html -
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Stages in the Industry Life Cycle
Strength and nature of five forces change as industry evolves
Shakeout stageDemand close tosaturation
Very competitivemarket Excess productivecapacityFocus on cost/differentiationstrategyFocus on growingthe market
NephroPlus, the kidney care chainthat has announced plans to set up100 units in various States, will go forsecond round of venture capital
funds in 9-12 months.
http://jobsearch.naukri.com/job-listings-Dialysis-Technician-Staff-Nurse-NephroPlus-Kidney-Care-Dialsysis-Centre-Agra-Alappuzha-Alleppey-Delhi-NCR-Delhi-Dehradun-Bengaluru-Bangalore-0-to-5-110613001806 -
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Stages in the Industry Life Cycle
Strength and nature of five forces change as industry evolvesMature stage Saturated marketwith low or nogrowth
Industryconsolidation dropping pricesand profitabilityFocus on cost /differentiationFocus on growingmarket or featurediversification
http://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.htmlhttp://www.indianmirror.com/tourism/hospitals.html -
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Stages in the Industry Life Cycle
Strength and nature of five forces change as industry evolves
Decline stagenegative industrygrowthPrices andprofitability
diminishExit of playersdepending on exitbarriersFocus onoperationalefficiency
http://www.momgrocery.com/product/9909/dabur-chyawanprash-avalehahttp://www.momgrocery.com/product/9909/dabur-chyawanprash-avalehahttp://www.momgrocery.com/product/9909/dabur-chyawanprash-avalehahttp://www.momgrocery.com/product/9909/dabur-chyawanprash-avalehahttp://www.momgrocery.com/product/9909/dabur-chyawanprash-avalehahttp://www.momgrocery.com/product/9909/dabur-chyawanprash-avalehahttp://www.momgrocery.com/product/9909/dabur-chyawanprash-avaleha -
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90% OF THE PRODUCTS WEUSE TODAY DID NOT EXIST IN
THE CURRENT FORM FIVEYEARS AGO
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90% OF THE PRODUCTS WEWILL BE USING FIVE YEARS
FROM NOW DOES NOT EXISTTODAY
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Limitations of Modelsfor Industry Analysis
Industry cycles do not always follow the life cyclegeneralization.
In rapid growth situations embryonic stage issometimes skipped, for example Apple iPad skippedthe embryonic stage
Industry growth revitalized through innovation orsocial change, for example Indian economic growth isrevitalizing growth in all Indian markets and it isdifficult to find a declining market in India
The time span of the stages can vary from industry to
industry eg- Automotive vs FMCG products.
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Limitations of Modelsfor Industry Analysis
Innovation and Change1. Punc tuated Equi l ibr iumoccurs when an industrys long termstable structure is punctuated with periods of rapid changeby innovation.
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Punctuated Equilibriumand Competitive Structure
Periods of long
term stability
Periods of long
term stability
Industry
Structure
revolutionized
by innovation
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Punctuated Equilibriumand Competitive Structure
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Limitations of Modelsfor Industry Analysis
Innovation and Change1. Punc tuated Equi l ibr iumoccurs when an industrys long term
stable structure is punctuated with periods of rapid changeby innovation.
2. Hypercom peti t ive industr iesare characterized by permanentand ongoing innovation and competitive change.
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Limitations of Modelsfor Industry Analysis
Company Differences There can be significant variances in the profit rates ofindividual companies within an industry.
In addition to industry attractiveness, company resources andcapabilities are also important determinants of its profitability.
Models provide useful ways of thinking about competitionwithin an industry but be aware of their limitations.
Sales T/O20012-13
Netprofit
Totalassets
Marketcapitialisation
Bajaj Auto 19,997.25 3,043.57 6,138.55 52,955.61Hero
Motocorp23,768.11 2,118.16 5,284.68 32,468.19
TVS Motors 7,065.00 116.02 1,884.76 1,546.41
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INTERNAL ANALYSIS
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Internal Analysis
The purpose of internal analysis is to pinpoint thestrengths and weaknesses of the organization.Streng ths lead to superior performance.
Weaknesses lead to infer ior performance.
StrengthsOf the enterpriseare assets that
boostprofitability
WeaknessesOf the enterpriseare liabilities that
lead to lowerprofitability
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Internal Analysis includes an assessment of: Quantity and quality of a companys resources and
capabilities Ways ofbuilding unique skills and company-specific or
distinctive competencies
Internal Analysis
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Organized paint industry in India
Sales Turnover Net Profit Total Assets Market Cap.
Asian Paints 8,971.70 1,050.00 3,069.02 42,008.55
Berger Paints 3,024.21 209.8 1,015.30 8,401.28
Kansai Nerolac 2,856.60 292.2 1,346.47 6,284.07Akzo Nobel 2,231.98 218.83 1,441.00 5,319.28
Shalimar Paints 530.18 11.02 132.56 176.32
Jenson Nicholson 59.25 -5.84 -228.48 9.17
Asian paints consolidated revenue from 17 countryoperation is Rs. 12300 cr ($ 2.3 B)
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Internal Analysis:A Three-Step Process
1. Understand the process by which companiescreate value for customers and profit forthemselves. Resources
Capabilities
Distinctive competencies2. Understand the importance ofsuperiority in
creating value and generating high profitability. Efficiency
Quality
3. Analyze the sources of the companyscompetitive advantage. Strengthsthat are driving profitability
Weaknesses opportunities for improvement
Innovation
Responsiveness to Customers
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Strategy, Resources,Capabilities, and Competencies
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Strategy, Resources,Capabilities, and Competencies
Resources Tangible (physical) and intangible (non-physical) Allow a company to create value for its customers
Must have skills to take advantage of the resources
Firm-specific and difficult-to-imitate resources
as well as valuable resources that create strong
demand for a companys products lead to
dist inct ive competencies
Has seven factories in India (largest capacity),
Has backward integration as cost of Rawmaterials fluctuatesHas Rs 4000 cr worth of financial resources athandFocus on Human resources and has been able toget and keep good people
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Strategy, Resources,Capabilities, and Competencies
Capabilities Coordinating resources & putting to productive use
Skillsreside in the organizations rules, routines
and procedures
Product of its organization, processes & controls
Firm-specific capabilities to manage its resources
lead todist inct ive competencies
Asian Paints has the widest and deepest distribution in
paint markets in India. It has a strong brands in allsegments. It has very good processes for operations.It leads in innovation in the industry (small packs,home solutions, textured paints, signature stores, colourideas etc). It has JVs with PPG of US (world no 2) forIndustrial coatings (auto, road paints, floor coats, whitegoods etc )
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Strategy, Resources,Capabilities, and Competencies
Distinctive CompetenciesFirm-specific strengths allow a company to
differentiate its products and/or achieve
substantially lower costs than its rivals in order to
gain a competitive advantage.
Superior market presence reach, availability,variety, good quality, competitive prices, homesolutions, colour ideas etcSuperior efficiency -lower cost due tostreamlined operations, backward integration,largest volume.More innovative than competitors.Perception of best quality.
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Strategy, Resources,Capabilities, and Competencies
Three genericStrategiesCompanies can aim to have one the three
strategies
Low Cost strategy (not low price); orDifferentiation strategy; orBoth Low cost and differentiation
Asian Paints is looking at both Low
cost and differentiation strategy
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Four approaches to createSustainable Competitive advantage
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Efficiency Measured by the quantity of inputs it
takes to produce a given output:
Efficiency = Outputs / Inputs
Productivity leads to greater efficiencyand lower costs:
Employee productivity
Capital productivitySuperior efficiency helps a company
attain a competitive advantagethrough a lower cost structure.
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One efficiency measure
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One more efficiency measure
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Quality Reliable and
Differentiated by attributes that customersperceive to have higher value
The impact of quality on competitiveadvantage: High-quality products differentiate and increase
the value of the products in customers eyes.
Greater efficiency and lower unit costs are
associated with reliable products.
Superior quality = customer perception ofgreater value in a products attributes
Form, features, performance, durability, reliability, style, design
Quality products are goods and services that are:
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InnovationInnovationisthe act of creating new productsor new processes Product innovation
Creates products that customers perceive as more
valuable and Increases the companys pricing options
Process innovation Creates value by lowering production costs
Successful innovation can be a majorsource of competitive advantageby givinga company something unique, something its
competitors lack.
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Responsiveness to Customers Superior quality and innovation are integral to
superior responsiveness to customers.
Customizing goods and services to the uniquedemands of individual customers or customergroups.
Enhanced customer responsivenessCustomer response time, design,
service, after-sales service and support
Superior responsiveness to customersdifferentiates a companys products and servicesand leads to brand loyalty and premium pricing.
Identifying and satisfying customersneedsbetter than the competitors
C ti S t i bl C titi
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Creating Sustainable Competitiveadvantage
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Concept of Value Creation/unit
Basic Principle: the more utility that consumersget from a companys products or services, the
more pricing options the company has.
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Concept of Value Creation/unit
Basic Principle: the lower the cost of companysproducts and services, the more pricing options
the company has.
H d A i P i t t
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How does Asian Paints createSustainable Competitive advantage
By focusing both on Low cost and Differentiationstrategy in India and executing it well over the lastfew decades, Asian Paints has created SustainableCompetitive Advantage that is very hard to beat.
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Organized paint industry in India
Sales Turnover Net Profit Total Assets Market Cap.
Asian Paints 8,971.70 1,050.00 3,069.02 42,008.55
Berger Paints 3,024.21 209.8 1,015.30 8,401.28
Kansai Nerolac 2,856.60 292.2 1,346.47 6,284.07
Akzo Nobel 2,231.98 218.83 1,441.00 5,319.28Shalimar Paints 530.18 11.02 132.56 176.32
Jenson Nicholson 59.25 -5.84 -228.48 9.17
Wh th k t
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Where are the weak spots(internal) in Asian Paints?
3. Analyze the sources of the companyscompetitive advantage. Strengthsthat are driving profitability
Weaknesses opportunities for improvement
4. Research and Development and expertise in
chemicals most paint companies in the globeare chemical companies (DuPont, BASF, AkzoNobel)
5. Global expansion to markets where there arevolumesworlds no. 1 Akzo Nobel has a
revenue of $18 B as compared to Asian paintsrevenue of $ 2.29 B
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World top five paint brands
Akzo Nobel (Ned) $17.3 BPPG Industries (US) $ 13.6 B
Sherwin Williams (US) -$ 7.57 B
Du Pont (US) - $ 5.12 BBASF (Ger) $ 4.62 B
Asian paints does not figure in the topten in the world
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Porters Value Chain
A company is a chain of activities for transforminginputs into outputs that customers valueincluding the primary and support activities.
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Porters Value Chain
Asian Paints creates superior value through marketingand sales even though it is better in most otherparameters when benchmarked with Indian companies
Competitive Advantage:
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Competitive Advantage:The Value Creation Cycle
In Paint industry, it takes decades to create competitiveadvantage and superior profitability
Punctuated Equilibrium
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Punctuated Equilibriumand Competitive Structure
Periods of long
term stability
Periods of longterm stability
Industry
Structurerevolutionized
by innovation
Measuring Competitive
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Measuring CompetitiveAdvantage and Profitability
Competitive Advantage When a companies profitability is greater than the average of allother companies in the same industry that compete for the samecustomers
Benchmarking
Comparing company performance against that of competitors andthe companys historic performance
Measures of Profitability
Return On Invested Capital (ROIC) Net profit Net income after tax
Capital invested Equity + Debt to creditors
Net ProfitNet Profit = Total revenues Total costs
=ROIC=
Measuring Competitive
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Measuring CompetitiveAdvantage and Profitability
Competitive Advantage When a companies profitability is greater than the average of allother companies in the same industry that compete for the samecustomers
Benchmarking
Comparing company performance against that of competitors andthe companys historic performance
Net Profit Total Assets ROIC
Asian Paints 1,050.00 3,069.02 34.21%
Berger Paints 209.8 1,015.30 20.66%
Kansai Nerolac 292.2 1,346.47 21.70%
Akzo Nobel 218.83 1,441.00 15.19%
Shalimar Paints 11.02 132.56 8.31%
Jenson Nicholson -5.84 -228.48 2.56%
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Drivers of Profitability (ROIC)
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Ways to Increase ROIC
Increase Companys Return on Sales Increase sales revenue more than costs Reduce cost of goods sold
Reduce spending on SG&ASales, Marketing, General & Administrative Expenses
Reduce R&D expensesResearch & Development
Increase Capital Turnover Reduce the amount of working capital
Inventory, Accounts Receivable, Payables
Reduce the amount of fixed capitalPPE - Property, Plant & Equipment
The Durability of Competitive
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The Durability of CompetitiveAdvantage
1.Barriers to ImitationMaking it difficult to copy a companys distinctive competencies
Imitating Resources Imitating Capabilities
2.Capability of Competitors Strategic commitment
Commitment to a par t icu lar way of doing bu s iness
Absorptive capacityAb il i ty to ident i fy , value, assimilate, and us e know ledge
3.Industry DynamismAbi l i ty of an indu stry to change rapid ly
The DURABILITY of a companys competitive advantage overits competitors depends on:
Compet i tors are also seeking to develop dis t inct ivecompetenc ies that wi l l give them a compet i t ive edge.
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Why Companies Fail
Inertia Companies find it difficult to change their strategies and
structures
Prior Strategic Commitments Limit a companys ability to imitate and cause competitive
disadvantage
The Icarus Paradox A company can become so specialized and inner directed
based on past success that it loses sight of market realities
When a company loses its competitive advantage,its profitability falls below that of the industry. It loses the abi l i ty to attract and generate resources. Prof i t margin s and invested capital shrink rapid ly.
Avoiding Failure:
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Avoiding Failure:Sustaining Competitive Advantage
1. Focus on the Building Blocks of CompetitiveAdvantageDevelop distinctive competencies and superior performance in:
Efficiency Quality Innovation Responsiveness to Customers
2. Institute Continuous Improvement and LearningRecognize the importance of continuous learning within the organization3. Track Best Practices and Use Benchmarking
Measure against the products and practices of the most efficient globalcompetitors
4. Overcome InertiaOvercome the internal forces that are barriers to change
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Developing a sound andhealthy organ izat ion requ iresunderstand ing the env i ronment
as much as understand ing theorganization.
- Gary Hamel
Strategic management co rse plan
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Strategic management course plan
Session 1 Introduction and overview to SM
Session 2/3 External and Internal environment
Session 3/4 Building SCA though value chains
Session 5
Growth through Integration, Diversification,Outsourcing and M&A
Session 6 Change management
Session 7 Tailoring strategies to fit specific industry &
company situations
Session 8/9 Strategy Implementation and control
Session 10 Industry interaction