strategic management module
DESCRIPTION
Concise additionTRANSCRIPT
Without a strategy the organization is like a ship without a rudder, going around in circles
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CONTENTS
The Concepts and Techniques of Strategic Management.
The Strategic management Process: An overview.
Establishing company Direction: Developing a Strategic Vision, setting objectives and crafting a strategy.
Industry and competitive analysises.
Evaluating company Resources and competitive capabilities.
Strategy and competitive advantage.
Strategies for Globalizing markets.
Tailoring strategy to fit specific industry and company situation.
Strategy and competitive advantage in diversified companies.Evaluating the strategies of diversified companies.
Building resource strengths and organization capabilities.
Managing the internal organization to promote better strategy execution.
CHAPTER 1
THE STRATEGIC MANAGEMENT PROCESS
Without a strategy the organization is like a ship without a rudder, going around in circles.
(Joel Ross and Michael Kamei)
Chapter Outline
Five tasks of strategic management Developing a strategic vision and mission
Setting objectives
Crafting performance and initiating corrective adjustments
Why strategic management is a process
Who performs the task of strategy?
Benefits of Managing Strategically
Terms to remember
Thinking Strategically:
The Three Big Strategic Questions
Where are we now what is our situation?
Where do we want to go?
Business (es) we want to be in and market positions we want to stake out
Buyer needs and groups we want to serve
Outcomes we want to achieve
How will we get there?
What is strategy?
Competitive moves and business approaches management employs in running a company
Managements game plan to
Please customers
Position a company in its chosen market
Compete successfully
Achieve good business performance
Why are strategies needed?
To proactively shape how a companys business will be conducted
To mold the independent actions and decisions of managers and employees into a coordinated, companywide game plan
The Five Tasks of Strategic Management
Missions vs. Strategic Visions
A mission statement focuses on current business activities Business(es) company is in now
Customer needs currently being served
A strategic vision concerns a firms future business path The kind of company it is trying to become
Customer needs to be satisfied in the future
Strategic Management Concept
N/L
Developing a Vision and Mission
The first task of Strategic Management
Begins with thinking strategically about
The firms future business makeup
Where to take the firm
The task is to Create a roadmap of a companys future
Decide what future business position to stake out
Provide long-term direction
Give the firm a strong identity
Developing a Strategic Vision
A strategic vision is a roadmap of a companys future Direction it is headed
Business position it intends to stake out
Capabilities it plans to develop
Customer needs it intends to serve
Examples: Mission and Vision Statements
McDonalds Corporation
McDonalds vision is to dominate the global foodservice industry. Global dominance means setting the performance standard for customer satisfaction while increasing market share and profitability through our Convenience, Value and Execution Strategies.
Example: Mission and Vision Statements
Avis Rent a-Car
Our business is renting cars. Our mission is total customer satisfaction.
American Red Cross
The mission of the American Red Cross is to improve the quality of human life; to enhance self-reliance and concern for others and to help people avoid, prepare for and cope with emergencies.
Examples: Mission and Vision Statements
Ritz-Carlton Hotels
The Ritz-Calton Hotel is a place where the genuine care and comfort of our guests is our highest mission
We pledge to provide the finest personal service and facilities for our guests who always enjoy a warm, relaxed yet refined ambiance.
The Ritz-Carlton experience enlivens the senses, instils well-being, and fulfils even the unexpressed wishes and needs of our guests.
Examples: Mission and Vision Statements
Otis ElevatorOur mission is to provide any customer a means of moving people and things up, down, and sideways over short distances with higher reliability than any similar enterprise in the world.Microsoft CorporationOne vision drives everything we do: A computer on every desk and in every home using great software as an empowering tool.
Examples: Mission and Vision Statements
The Body Shop
We aim to achieve commercial success by meeting our customers needs through the provision of high quality, good value products with exceptional service and relevant information which enables customers to make informed and responsible choices.
Eastman Kodak
We are in the picture business
Examples: Mission and Vision Statements
Intel
Intel supplies the computing industry with chips, boards, systems, and software. Intels products are used as building blocks to create advanced computing systems for PC users. Intels mission is to be the preeminent building block supplier to the new computing industry worldwide
Compaq Computer
To be the leading supplier of PCs and PC servers in all customer segments.
Examples: Mission and Vision Statements
Long John Silvers
To be Americas best quick service restaurant chain. We will provide each guest great tasting, healthful, reasonably priced fish, seafood, and chicken in a fast, friendly manner on every visit.
Bristol-Myers Squibb
The mission is to extend and enhance human life by providing the highest quality health and personal care products. We intended to be the preeminent global diversified health and personal care Company.
Types of Objectives Required
Financial Objectives
Outcomes focused on improving a firms financial performance
Strategic Objectives
Outcomes focused on improving a firms competitiveness and its long term business position
Examples: Strategic Objectives
Increase firms market share
Overtake key rivals on quality or customer service or product performance.
Attain lower overall costs than rivals
Boost firms reputation with customers
Attain stronger foothold in international markets
Achieve technological superiority
Become leader in new product introductions
Capture attractive growth opportunities
Setting Objectives
The Second Task of strategic Management
-Establishing Objectives-
Converts vision into specific performance targets.
Create yardsticks to track performance
Pushes firm to be inventive and focused
Helps prevent coasting and complacency if targets require stretch
Examples: Financial Objectives
Grow earnings per share 15% annually
Boost annual return on investment (or EVA) from 15% to 20%
Increase annual dividends per share to stockholders by 5% each year.
Strive for stock price appreciation equal to or above the S & P 500 average
Maintain a positive cash flow
Achieve and maintain a AA bond rating
Example: Corporate Objectives
Protect and improve Nike's position as the number one athletic brand in America.
Build a strong momentum in growing fitness market.
Intensify the companys effort to develop products that are women need and want
Explore the market for products specifically designed for the requirements of maturing Americans.
Direct and manage the companys international business as it continues to develop.
Continue the drive for increased margins through proper inventory management and fewer, better products.
Example: McCormicks Corporate Objectives
Dispose of those parts of our business which cannot generate adequate returns or do not fit with our business strategy
Achieve a 20% return on equity
Achieve net sales growth rate of 10% per year
Maintain an average earning per share growth rate of 15% per year
Maintain a total debt to total capital at 40% or less
Pay out 25% to 35% of net income in dividends
Example: Strategic and Financial Objectives
Ford Motor Company
To satisfy our customers by providing Quality cars and trucks.
Developing new products
Reducing the time it takes to bring new vehicles to market
Improving the efficiency of all our plants & processes, and
Building on our teamwork with employees unions, dealers, and suppliers.
Example: Strategic and Financial Objectives
General Electric
To become the most competitive enterprise in the world by being number one or number two in market share in every business the company is in. To achieve an average of 10 inventory turns and a corporate operating profit margin of 16% by 1998.
Examples: Strategic and Financial Objectives
Banc One Corporation
To be one of the top three banking companies in terms of market share in all significant markets we serve.
Dominos Pizza
To safely deliver a hot, quality pizza in 30 minutes or less at a fair price and a reasonable profit.
Examples: Strategic and Financial Objectives
Exxon
To provide shareholders a secure investment with a superior return.
Alcan Aluminum
To be the lowest-cost producer of aluminum and to outperform the average return on equity of the Standard and Poors industrial stock index.
Examples: Strategic and Financial Objectives
Bristol-Myers Squibb
To focus globally on those businesses in health and personal care where we can be number one or number two through delivering superior value to the customer.
Atlas Corporation
To become a low-cost, medium-size gold producer, producing in excess of 125000 ounces of gold a year and building gold reserves of 1 500 000 ounces.
Example: Strategic Financial Objectives
3M Corp
Annual growth in earnings per share of 10% or better on average
A return on stockholders equity of 20 25%
A return on capital employer of 27% or better
Have at least 30% of sales come from products introduced in the past four years.
Crafting a strategy
Crafting a strategy:
Involves deciding how to:
Respond to changing buyer preferences
Outcome rivals
Respond to new market conditions
Grow the business over the long term
Achieve performance targets
Strategy is Both Planned and Reactive to Changing circumstances
Planned
Adaptive
Reactions
The Hows That Define a Firms Strategy
How to grow the business
How to please customer
How to out complete rivals
How to respond to changing market conditions
How to manage each functional piece of the business and develop needed organizational capabilities
How to achieve strategic and financial objectives
Crafting a Strategy
The Third Task of Strategic Management
Strategy involves determining whether to Concentrate on a single business or several business (diversification)
Cater to a broad range of customers or focus on a particular niche
Develop a wide or narrow product line
Pursue a competitive advantage based on
- Low cost or
- Product superiority or
- Unique organizational capabilities
Strategy: McDonalds
Strategic PrioritiesContinued growth
Providing
Remaining an efficient and quality producer
Offering high value and good tasting products.
Effectively marketing McDonalds brand on a global scale
Core Elements of Mc Donalds Strategy
Add 2500 restaurants annually
Promote frequent customer visits via attractive menu items, low-price specials and extra value meals
Be highly selective in granting franchises
Locate on sites offering convince to customers and profitable growth potential
Focus on limited menu and consistent quality
Careful attention to store efficiency
Extensive advertising and use of Mc prefix
Hire courteous personnel, pay an equitable wage, provide good training
Crafting strategy is an Exercise in Entrepreneurship
Strategy making is a market- driven and customer driven activity that involves Risk taking and venturesomeness
Innovation and business creativity
Keen eye for spotting market opportunities
Keen observation of customer needs
Choosing among alternatives
Characteristics of Entrepreneurial Managers
Boldly pursue new strategic opportunities
Emphasize out-innovating the competition
Lead the way to improve firm performance
Willing to be first-mover and take risks
Respond quickly and opportunistically to new developments
Devise trail blazing strategies
Why Do Strategies Evolve?
There is always an ongoing need to react toShifting market conditions
Fresh moves of competitions
New technologies
Evolving customer preferences
Political and regulatory changes
New windows of opportunity
Then crisis of the moment
What is a Strategic Plan?
Where firm is headed
Strategic vision and business mission
Short and long term performance
Strategic and financial objectives
Action approaches to achieve targeted results
A comprehensive strategy
Implementing Strategy
The fourth task of Strategic Management
Creating fits between way things are done and what it takes for effective strategy execution
Getting the organization to execute strategy proficiency and efficiently
Producing excellent results in a timely manner
Strategy Implementation
Strategy implementation is an internal, operation-driven activity involving organizing, budgeting, motivating, culture-building, supervising and leading to make the strategy work as intended!
What does strategy implementation include?
Building a capable organization
Allocating resources to strategy-critical activities
Establishing strategy-supportive policies
Motivating people to pursue objectives
Tying rewards to achievement of results
Creating a strategy-supportive corporate culture
Installing needed information, communication, and operating systems
Instituting best practices for continuous improvement
Exerting strategic leadership
Evaluating Performance
The tasks of strategy are not a one-time only exercise
Times and conditions change
Events unfold
Better ways to do things emerge
- New managers with different ideas take over
Evaluating Performance
The tasks of strategy are not a one-time only exercise
Times and conditions change
Events unfold
Better ways to do things emerge
- New managers with different ideas take over
Evaluating Performance
Corrective adjustments Alter long-term direction
Redefine the business
Raise or lower performance objectives
Modify the strategy
Improve strategy execution
Characteristics of the strategic Management Process
Need to perform tasks never goes away
Boundaries among tasks are blurry
Strategizing is not isolated from other managerial activities
Time required comes in lumps and spurts
The big challenge is to get the best strategy supportive performance from employees, perfect current strategy and improve strategy execution
Who Performs the Five Strategic Management Tasks?
Senior corporate level executives
Subsidiary unit managers
Functional area managers
Operating managers
Strategizing an Individual or Group Responsibility?
Teams are increasingly used because Strategic issues cut across departmental lines
Ideas of people with different backgrounds can be tapped into
More people will have an ownership stake in the strategy
Strategizing an Individual or Group Responsibility?
Teams are increasingly used because Strategic issues cut across departmental lines
Ideas of people with different backgrounds can be tapped into
More people will have an ownership stake in the strategy
Strategizing an Individual or Group Responsibility?
Teams are increasingly used because Strategic issues cut across departmental lines
Ideas of people with different backgrounds can be tapped into
More people will have an ownership stake in the strategy
Role of Strategic Planners
Gather necessary information
Provide support in revising strategic plans
Coordinate review and approval process
Crystallize strategic issues to be addressed
Conduct studies of industry and competitive conditions
Establish an annual review cycle
Develop strategy performance assessments
Why Planers should not be strategy makers
Managers may toss tough decisions to planners
Planers know less about companys situation
Difficult to fix accountability for poor results
Managers have no buy in to strategy
Strategic planning may be viewed as an unproductive bureaucratic activity
Strategic Management Principle
Strategy making is a job for line managers, not a staff of planners doers should be the strategy-makers!
Strategic Role of a Board of Directors
Continuously audit validity of a companys long-term direction ad strategy
Evaluate strategic leadership skills of the CEO and candidates to succeed the CEO
Strategic Management Principle
A board of directors role in the strategic management process is to critically appraise and ultimately approve strategic action plans, but rarely, if ever, to develop the details!
Benefits of Strategic Approach to Managing
Guides entire firm regarding what is we are trying to do and to achieve
Lowers managements threshold to change
Provides basis for evaluating competing budget requests
Unifies numerous strategy-related decisions
Creates a proactive atmosphere
Enhances long range performance
Recap Key Terms
Strategic Vision
A view of an organizations future direction and business course; a guiding concept for what the organization is trying to do and to become
Organization Mission
Represents managements customized answer to the question what is our business and what will it be. A mission statement broadly outlines the organizations future direction ad serves as a guiding concept for what the organization is to do and to become.
Long-range Objectives
Achievement levels to be reached within the next three to five years.
short-range Objectives
Near-term performance target: they establish the pace for achieving the long-range objectives.
Performance Objectives
Organizations targets for achievement: both short and long range objectives are needed
Financial Objectives
Financial performance targets a company wants to achieve
Strategic Objectives
Targets relating to strengthening a companys overall market position and competitive viability
Strategy
Managerial action plan for achieving organizational objectives; strategy is mirrored in the pattern of moves and approaches devised by management to produce the desired performance. Strategy is the how of pursuing an organizations mission and reaching target objectives.
Strategic Plan
Statement outlining an organizations mission and future direction, near-term and long-term performance targets and strategy, in light of organizations external and internal situations.
Strategy Implementation
Includes the full range of managerial activities associated with putting the chosen strategy into place, supervision its pursuit and achieving the targeted results.
Exercise
Depict the strategic management
Define strategic management
Name the benefits of strategic management
Discipline and sense of responsibility
Name the risks of strategic management
6. Name the three-comptemporary special applications of strategic management discussed in this book.
CHAPTER 2
THE STRATEGY - MAKING TASKS
A strategy is a commitment to undertake one set of actions rather than another
(Sharon M Oster)
Chapter Outline
Developing a strategic vision/mission
Establishing financial and strategic objectives
Crafting a strategy
Factors shaping a companys strategy
Linking strategy with ethics
Approaches to performing the strategy-making task
Developing a Vision or Mission
First direction-setting task
Indicates the long-term course management has charted for the organization Business activities to be pursued
Future market position
Future customer focus
- Kind of company to become
Why have a Mission or Strategic Vision?
Power of a well-conceived strategic vision Guides managerial decision making
Arouses employee buy-in and commitment
Prepares a company for the future
Characteristics of a Strategic Vision
Charts a companys future strategic course Defines the business makeup in 5 to 10 yearsCompany specific, not genetic Provides a company with its own special identity and path to follow The vision is not to make a profit The real mission/vision is what will we do to make a profit?Requires the exercise of management foresight
Elements of a Strategic Vision
Defines present and future Business make up of company
Charts a long-term path to follow
DELTA AIRLINES
we want Delta to be the
WORLD WIDE AIRLINE OF CHOICE
Example: Strategic Vision
DELTA AIRLINES
WORLDWIDE, because we are and intend to remain an innovative, aggressive, ethical and successful competitor that offers access to the world at the highest standards of customer service. We will continue to look for opportunities to extend our reach through new routes and creative global alliances.
Example: Strategic Vision
DELTA AIRLINES
OF CHOICE, because we have value the loyalty of our customers, employees and investors. For passengers and shippers, we will continue to provide the best service and value. For our personnel, we will continue to offer an evermore challenging, rewarding and result-oriented workplace that recognizes and appreciates their contributions. For our shareholders, we will earn a consistent, superior financial return.
Example: Strategic Vision
DELTA AIRLINES
AIRLINE, because we intend to stay in the business we know best air transport and related services. We wont stray from our roots. We believe in the long-term prospects for profitable growth in the airline industry and we will continue for focus time, attention and investment on enhancing our place in that business environment
Defining a Companys Business
A good business definition incorporates three factors:
Customer needs WHAT is being satisfied
Customer groups WHO is being satisfied
Technologies used and functions performed HOW customer needs are satisfied
Business Mission: Russell Corp.
Russell Corporation is a vertically integrated international designer, manufacturer and mark of athletic uniforms, and a comprehensive of lightweight, yarn-dyed woven fabrics
The companys manufacturing operations include the entire process of converting raw fibers into finished apparel and fabrics
Products are marketed to sporting goods dealers, department and specially stores, mass merchandisers and other apparel manufacturers
Business Mission: McDonalds
Serving a limited menu of hot, tasty food quickly in a clean, friendly restaurant for a good value to a broad base of fast-food customers worldwide
McDonalds serves approximately 30 million customers daily at 20.000-plus restaurants in over 90 countries
Broad Narrow Mission Statements?
Narrow enough to specify real arena of interest
Serve as
Boundary for what to do and not do
Beacon of where top management intends to take firm
Diversified companies employ broader business definitions
Definitions: Broad-Narrow scope
Mission Statement of a Diversified Firm
TIMES MIRROR CORPORATION
Times mirror is a media and information company principally engaged in newspaper publishing, book, magazine and other publishing and cable and broadcast television
Mission Statements for Functional Departments
Spotlights Departments Contribution to firms mission/vision/objectives
Role and scope of activities
Direction which department needs to pursue
Mission Statements of Functional Departments
Human Resources
To contribute to organizational success by developing effective leaders, creating high performance teams and maximizing the potential of individuals
Corporate Security
To provide service for the protection of corporate personnel and assets through preventive measures and investigations
Intels Strategic Inflection Points
Pre-mid 1980sBusiness focus was memory chips Post-mid 1980sAbandon memory chip business
Adopt new strategic vision
Become preeminent supplier of microprocessors to PC industry
Make PC central appliance in workplace and home
Be undisputed leader in driving PC technology forward
Decision Time:What will the Vision Be?Entrepreneurial challenge
Creatively preparing a company for the future Astute strategists focus on Shifting customer needs
New technologies
Attractive foreign markets
Growing or shrinking opportunities
Decision Time:What will the Vision Be?Entrepreneurial challenge
Creatively preparing a company for the future Astute strategists focus on Shifting customer needs
New technologies
Attractive foreign markets
Growing or shrinking opportunities
Communicating the Vision
An exciting, inspirational vision Inspires, challenges and motivates workforce
Arouses strong sense of organizational purpose and induces employee buy-in
Brings workforce together and galvanizes people to live the business
Managerial Value: Strategic Vision and Mission
Crystallizes long-term direction Reduces risk or 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
Establishing Objectives
Second Direction-Setting Task
Represent commitment to achieve specific performance targets by a certain time
Must be stated in quantifiable terms and contain a deadline for achievement
Spell-out how much of what kind of performance by when
Purpose of Objectives
Substitutes results-oriented decision-making for aimlessness over what to accomplish
Provides benchmarks for judging organizational performance
Strategic Management Principle
Companies whose managers set objectives for each key result area and then press forward with actions aimed directly at achieving these performance outcomes typically outperform companies while managers exhibit good intentions, try hard and hope for the best!
Types of Objectives Required
Financial Objectives
Outcomes that improve a firms financial performance
Strategic Objectives
Outcomes that strengthen a firms competitiveness and long-term market position
Strategic Management Principle
Every company needs bothstrategic and financial objectives!
Examples: Financial Objectives
Achieve revenue growth of 10% per year
Increase earnings by 15% annually
Increase dividends per share by 5% per year
Increase net profit margins from 2% to 4%
Attractive EVA performance
Stronger bond and credit ratings
A rising stock price (outperform the S&P 500)
Attractive increases in MVA
Recognition as a blue chip company
A more diversified revenue base
Examples: Strategic Objectives
A bigger market share
Quicker design-to-market times than rivals
Higher product quality than rivals
Lower costs relative to key competitors
Broader product line than rivals
A stronger reputation with customers than rivals
Better customer service than rivals
Recognition as a leader in technology
Wider geographic coverage than rivals
More innovative products than rivals
Corporate Objectives: McDonalds
To achieve 100 percent total customer satisfaction everyday in every restaurant for every customer
Corporate Objectives: 3M Corporation
30 percent of the companys annual sales must come from products fewer than four years old.
Corporate Objectives: Anheuser-Busch
To make all our companies leaders in their industries in quality while exceeding customer expectations
To achieve a 50% share of the U.S beer market
To establish and maintain a dominant leadership position in the international beer market
To provide all our employees with challenging and rewarding work, and opportunities for personal development, advancement and competitive compensation
To provide our shareholders with superior returns by achieving double-digit annual earnings per share growth
Corporate Objectives: McCormick & Co.
To achieve a 20 percent return on equity
To achieve a net sales growth rate of 10 percent per year
To maintain an average earnings per share growth rate of 15 percent per year
To maintain total debt-to-total capital at 40 percent or less
To pay out 25% to 35% of the net income in dividends
Strategic or Financial Objectives
Which Take Precedence?
Pressure for better short-term financial performance become pronounced when Firm is struggling financially
Resource commitments for new strategic initiatives may hurt bottom-line for several years
Proposed strategic moves are risky
A firm that consistently passes up opportunities to strengthen its long-term competitive position Risks diluting its competitiveness
Risks losing momentum in its markets
- Can hurt its ability to fend off rivals challenges
Strategic Management Principle
Building a stronger long-term competitive position benefits shareholders more lastingly than improving short-term profitability!
The Concept of Strategic Intent
A Company exhibits Strategic Intent when it relentlessly pursues an ambitious strategic objective and concentrates its competitive actions and energies on achieving that objective!
The Concept of Strategic Intent
Indicates firms intent to stake out a particular position over the long-term
Serves as a rallying cry for employees to do their very best
Signals deep-seated commitment to winning
Short-Ranger and Long-Ranger Objectives
Short-range Objectives
Targets to be achieved soon
Serve as star steps for reaching long-range performance
Long Range Objectives
Targets to be achieved within 3 to 5 years
Prompt actions now that will permit reaching targeted long-range performance later
Objectives are needed at all Levels
Process is top-down, not bottom-up
First, establish organization-wide objectives
Next, set business and product line objectives
Then, establish functional and departmental objectives
Individual objectives come last
Strategic Management Principle
Objectives-setting needs to be more of a top-down than a bottom-up process in order to guide lower-level managers and organizational units toward outcomes that support the achievement of overall business and company objectives.
Crafting a Strategy
Third Direction Setting Task
An organization's strategy deals withHow to make management's strategic vision a reality
The game plan for
Moving the company into an attractive business position
Building A sustainable competitive advantage
Strategizing is How to
Achieve performance targets
Out-compete rivals
Achieve sustainable competitive advantage
Strengthen firms long-term competitive position
Make the strategic vision a reality
Fig. 2-1(a): Level of Strategy-Making:
A Diversified Company
Corporate level Managers
Two-way influence
Business-level Managers
Two-way influence
Functional-level Managers
Two-way influence
Operating-level Managers
Fig. 2-1(a): Level of Strategy-Making: A Single Business Company
Executive-level Managers
Two-way influence
Functional-level Managers
Two-way influence
Operating-level Managers
Characteristics of strategy - Making
Action oriented
Evolves over time
A never-ending, ongoing task
Corporate Strategy for a Diversified Company
Tasks of Corporate Strategy
Moves to achieve diversification
Actions to boost of individual businesses
Capturing synergy among business units 2+2=5 effects!
Establishing investment priorities and steering corporate resources into the most attractive business units
Strategy Components of a Single-Business Company
What Business Strategy Involves
Forming responses to changes in industry and competitive conditions, buyer needs and preferences, economy, regulations etc
Crafting competitive moves leading to sustainable competitive advantage
Building competitively valuable competencies and capabilities
Uniting strategic initiative of functional areas
Addressing strategic issues facing the company
Functional Strategies
Game plan for a strategically-relevant function, activity or business process
Details how key activities will be managed
Provide support for business strategy
Specify how functional objectives are to be achieved
Operating Strategies
Concern narrower strategies for managing grassroots activities and strategically-relevant operating units
Add detail to business and functional strategies but of lesser scope
Example: Operating Strategy
Boosting Worker Productivity
To boost productivity by 10%, managers of firm with low-price, high-volume strategy take following actions Recruitment manager develops selection process designed to weed out all best-qualified candidates
Information systems manager devises way to use technology to boost productivity of office workers
Compensation manger devises improved incentive compensation plan
Purchasing manager obtains new efficiency
Increasing tools and equipment
Example: Operating Strategy
Improving Delivery & Order-Filling
Manufacturer of plumbing equipment emphasizes quick delivery and accurate order-filling as keystones of its customer service approach
Warehouse manager took following approaches:
Inventory stocking strategy allowing 99% of all orders to be completely filled without backordering any item
Staffing strategy of maintaining workforce capability to ship any order within 24hrs
Uniting the Companys Strategy Making Effort
A companys strategy is a collection of strategies and initiatives
Separate levels of strategy must be unified into a cohesive company-wide action plan
Pieces of strategy should fit together like puzzle pieces
Networking of Missions, Objectives and Strategies
Level 1
Corporate level managers
Two way influence Two way influence Two way influence
Level 2
Business level managers
Two way influence Two way influence Two way influence
Level 3
Functional level managers
Level 4 Two way influence Two way influence Two way influence
Plant managers, lower
Level supervisors
Strategic Management Principle
Objectives and strategies that are unified from top to bottom of the strategy-making managerial hierarchy require a team effort
Factors Shaping the Choice of Company Strategy
External Factors
Internal Factors
Social, Political, Regulatory, and Citizenship Factors
Pressures from special interest groups
Glare of investigative reporting
Health and nutrition concerns
Concerns about alcohol and drug abuse
Sexual harassment
Corporate downsizing
Impact of plant closings on communities
Rising/falling interest rates
Recessionary economy conditions
Trade restrictions, tariffs and import quotas
Corporate Social Responsibility
Conduct company activities within bounds of what is considered ethical and in interest
Respond positively to emerging societal priorities and expectations
Demonstrate willingness to take needed action ahead of regulatory confrontation
Balance stockholder interests against larger interest of society as a whole
Be a good citizen in community
Competitive Conditions and Industry Attractiveness
A companys strategy has to be responsive to Fresh moves of rival competitors
Changes in industrys price-cost-profit economics
Shifting buyer needs and expectations
New technological developments
Pace of market growth
Strategic Management Principle
A companys strategy cant produce real market success unless it is well-matched to industry and competitive conditions
Company Opportunities and Threats
For strategy to be successful, it has to be well matched to
A companys opportunities
Threats to the companys well-being
Company Strengths, Competencies, and Competitive Capabilities
A company must have or be able to acquire the resources, competencies and competitive capabilities needed to execute the chosen strategy
Resource defiance's, gaps in skills, and weaknesses in competitive position make pursuit of certain strategies risky or altogether unwise
Strategic Management Principle
A companys strategy ought to be grounded in its resource strengths and in what it is good at doing (its competencies and competitive capabilities): it is perilous to craft a strategy whose success is depended on resources and capabilities that a company lacks!
Ambitions, Philosophies and Ethics of Key Executives
Managers generally stamp strategies they craft with their own personal
Ambitions
Values
Business philosophies
Attitudes toward risk
Ethical beliefs
Shared Values and Company Culture
Values and culture can dominate strategic moves a company will Consider
Reject
A company should not undertake strategic moves which conflict with Its culture
Values widely shared by managers and employees
Hewlett-Packards Basic Values: The HP Way
Sharing firms success with employees
Showing trust and respect for employees
Providing customers with products/services of the greatest value
Being genuinely interested in providing customers with effective solutions to their problems
Making profit a high stockholder priority
Avoiding use of long-term debt to finance growth
Individual initiative, creativity & teamwork
Being a good corporate citizen
Linking Strategy with Ethics
Ethical and moral standards to beyond Prohibitions of law and
Language of thou shalt not to
Issues of duty and
- Language of should and should not do
Ethical Responsibilities of Firm to Stakeholders
Owner/shareholders expect some form of return on their investment
Employees expect reliable, safe product or service
Suppliers expect equitable relationship with firm
Community expect businesses to be good citizens in their community
Strategic Management Principle
To be a real winner, a strategy must
Fit the enterprises situation
Build sustainable competitive advantage
Improve company performance
Tests of a Winning Strategy
Goodness of Fit Test How well is strategy matched to firms situation?Competitive advantage test Does strategy lead to sustainable competitive advantage?Performance Test
Does strategy boost firm performance
Tests of a Winning Strategy
Goodness of Fit Test How well is strategy matched to firms situation?Competitive advantage test
- Does strategy lead to sustainable competitive advantage?
Performance Test
- Does strategy boost firm performance
Strategic management
To be a real winner, a strategy must:
Fit the enterprises situation
Build sustainable competitive advantage
Improve company performance
Approaches to Performing the Strategy-Making Task
Master Strategist
Manager personally functions as chief strategist
Delegate it to others
Manager delegates strategy-making to others
Collaborative
Manager enlists help of key subordinates in hammering out consensus strategy
Champion
Manager encourages subordinates to develop and implement strong strategies
Looking Back
What is a Vision Statement?
What are the components of the mission statement?
In what way is strategic intent related to both the mission and the vision statement?
Do all companies require both financial and strategic objectives?
Why should a companys strategy match industry competitive conditions?
Key Terms
Vision/mission - Corporate StrategyBroad Narrow Mission Statement - Functional Strategy
Financial Objectives - Operating Strategy
Strategic Objectives - Key Executives
Crafting a Strategy - Ethical responsibility
Chapter 3
INDUSTRY AND COMPETITIVE ANALYSIS
Analysis is the critical starting point of strategic thinking.(Kenichi Ohmae)
Chapter Outline
Role of situation analysis in strategy-making
Methods of industry and competitive analysis
Industrys competitive forces
Industrys competitive forces
Drivers of industry change
Competitive positions of rivals
Competitive moves of rivals
Key success factors
Conclusions: overall industry attractiveness
Conducting an industry and competitive analysis
What is Situation Analysis
Focuses on two considerations A companys EXTERNAL or MACRO-ENVIRONMENT Industry and competitive conditionsA companys INTERNAL or MICRO ENVIRONMENTIts competencies, capabilities, resource, strengths and weakness and competitiveness
Good Situation Analysis Leads to Good Strategic Choices
Key Considerations Regarding the External Environment
Industrys dominant economic traits
Competitive forces and strength of each force
Predicting the moves of competitors
Drivers of change in the industry
Conclusions about industry attractiveness
Question 1: What are the Industrys Dominant Economic Traits?
Market size and growth rate
Scope of competitive rivalry (height, intensity)
Number of competitors and their relative sizes.
Prevalence of backward/forward integration
Entry /exit barriers
Nature and pace of technological change
Product and customer characteristics
Scale economies and experience curve effects
Capacity utilization and resource requirements
Industry profitability
The Experience Curve Effect
An experience curve exists when unit costs decline as cumulative production volume increase because of
- Accumulating production know how
- Growing mastery of the technology
The bigger the experience curve effect, the bigger the cost advantage of the firm with the largest cumulative production volume.
Cost Advantages of Different Experience Curve Effects
Cost per Unit
1 2 4 8
Million Million Million Million
Units Units Units Units
Question 2: What is Competition like & how strong are the Competitive Forces?
Objective
To identify Main sources of competitive forces
Strength of these forces
Key analytical tools Five forces models of competition
Five Forces Model of Competition
.
Analyzing the Five Competitive Forces: How to do it
Asses strength of each competitive force
Rivalry among competitors
Substitute products
Potential entry
Bargaining power of buyers
Explain how each force acts to create competitive pressure.
Decide whether overall competition is brutal fierce, strong, normal/moderate, or weak
Rivalry among Competing sellers
Usually the most powerful of the five forces
Check which weapons of competitive rivalry are most actively used by rivals in jockeying for position
Price
Quantity
Performance features offered
Customer service
Warranties / guarantees
Advertising / promotions
Dealer networks
Product innovation
What Causes rivalry to be stronger?
Lots of firms, more equal in size and capability
Slow market growth (competing for a small market)
Industry conditions tempt some firms to go on the offensive to boost volume and market share
Customers have low costs in switching brands
One or more firms initiates moves to bolster their standing at expense of rivals
A successful strategic move carries a big payoff
Cost more to get out of business than to stay in
Firms have diverse strategies, corporate priorities resources, and countries of origin.
Principle of Competitive Markets
Competitive jockeying among rival firms is dynamic and ever changing
As industry members initiate new offensive and defensive moves
As emphasis swings from one mix of competitive weapons to another
Principle of Competitive Markets
Competitive jockeying among rival firms is dynamic and ever changing
As industry members initiate new offensive and defensive moves
As emphasis swings from one mix of competitive weapons to another
Competitive Force of Potential Entry
Seriousness of threat depends on Barriers to entry
Reaction of existing firms to entry
Barriers exist whenNewcomers confront obstacles
Economic factors put potential entrant at a disadvantage relative to incumbent firms
Common Barriers to Entry
Economic of scale
Inability to gain access to specialized technology
Existence of learning/experience curve effects
Strong brand preferences and customer loyalty
Capital requirements and/or other specialized resource requirements
Cost disadvantages independent of size
Access to distribution channels
Regulatory policies, tariffs, trade restrictions
Principle of Competitive Markets
Threat of entry is stronger when
Entry barriers are low
Sizeable pool of entry candidates exists
Incumbents are unwilling or unable to contest a newcomers entry efforts
Newcomer can expect to earn attractive profits
How to tell whether substitute Products are a strong forces
Sales of substitutes are growing rapidly
Producers of substitutes are planning to add new capacity
Their profits are up
Competitive Force of Suppliers
Suppliers are a strong competitive force when:Item makes up large portion of products costs is crucial to production process and or significantly affects products quality
It is costly for buyers to switch suppliers
They have good reputations and growing demands
They can supply a component cheaper than industry members can make it themselves
They do not have to contend with substitutes
Buying firms are not important customers
Competitive Force of Substitute Products
Concept
Substitutes matter when customers are attracted to the products of firms in other industries
Examples
Eyeglasses vs. contact lens
Sugar vs. glass vs. metal vs. wood
Newspapers vs. TV Internet
Transport vs. Letters
Principle of Competitive Markets
The competitive threat of substitutes is stronger when they are:
Readily available
Attractively priced
Believed to have comparable or better performance features
Customer switching costs are below
Principle of Competitive Markets
Suppliers are a stronger force the more they can exercise power over:
Price charged
Quality/performance or items supplied
Amounts and delivery times
Competitive Force of Buyers
Buyers are a stronger competitive force when They are large and purchase a sizeable percentage of industrys product
They buy in volume quantities
They can integrate backward
Industrys product is standardized
Their costs in switching to substitutes or other brands are low
They can purchase from several sellers
Product purchased does not save buyer money
Principle of Competitive Markets
Buyers are a stronger competitive force the more they have leverage to bargaining over:
Price
Quality
Service
Other terms and conditions of sale
Strategic Implications of the Five Competitive Forces
Competitive environment is unattractive when: Rivalry is strong
Entry barriers are low
Competition from substitutes is strong
Suppliers and customers have considerable bargaining power
Coping with the Five Competitive Forces
Objective is to craft a strategy that will: Insulate firm from competitive forces
Influence competitive pressures in ways that favor company
Build a sustainable competitive advantage
Strategic Implications of the Five Competitive Forces
Competitive environment is ideal when:Rivalry is moderate
Entry barriers are high
Good substitutes do not exist
- Suppliers and customers are in a weak bargaining position
Question 3: What Forces are at Work to Change Industry Conditions?
Industries change because forces are driving industry participants to alter their actions
Driving forces are the major underlying causes of changing industry and competitive conditions
Analyzing Driving Forces
Identify those forces likely to exert greatest influence over next 1 3 years Usually no more that 3 4 factors qualify
Assess impact
What differences will the forces (favorable? Unfavorable?)
Common Types of Driving Forces
Changes in low-term industry growth rate
Changes in who buys the product and how they use it
Product innovation
Technological change/process innovation
Marketing innovation
Entry or exit of major firms
Diffusion of technical knowledge
Common Types of Driving Forces
Increasing globalization of industry
Changes in cost and efficiency
Market shift from standardized to differentiated products (or vice versa)
New regulatory policies and/or government legislation
Changing societal concerns, attitudes and lifestyles
Changes in degree of uncertainty and risk
Question4: Which Companies are in Strongest/Weakest Positions?
One technique for revealing the different competitive positions of industry rivals is strategic group mapping
A strategic group consists of those rivals with similar competitive approaches in an industry
Environmental Scanning
Definition
Monitoring and interpreting sweep of social political, economic, ecological and technical events to spot budding trends that could eventually impact industry
Purpose
Raise consciousness of managers and potential developments that could Have important impact on industry conditions
Pose new opportunities and threats
Strategic Group Mapping
Firms in same strategic group have two or more competitive characteristics in common:Sell in same price/quality range
Cover same geographic areas
Be vertically integrated to same degree
Have comparable product line breadth
Emphasize same types of distribution channels
Offer buyers similar services
Use identical technological approaches
Procedure: Constructing a Strategic Group Map
Step 1: Identify competitive characteristics that differentiate firms in an industry from one another
Step 2: Plot firms on a two-variable map using pairs of these differentiating characteristics
Step 3: Assign firms that fall about the same strategy space to same strategic group
Step 4: Draw circles around each group, making circles proportional to size of groups respective share of total industry sales
Guidelines: Strategic Group Maps
Variables selected as axes should not be highly correlated
Variables chosen as axes should expose big differences in how rivals compete
Variables do not have to be either quantitative or continuous
Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group
If more than two good competitive variables can be used, several maps can be drawn
Interpreting Strategic Group Maps
Driving forces and competitive pressures often favor strategic groups and hurt others
Profit potential of different strategic groups varies to strengths and weaknesses in each groups market position
The closer strategic groups are on map, the stronger the competitive rivalry among member firms tends to be
Question 5: What Strategic Moves are Rivals likely to make next?
A firms own best strategic moves are affected by Current strategies of competitors
Actions competitors are likely to take next
Profiling key rivals involves studying
Current position in industry
Strategic objectives
Basic competitive approaches
Competitor Analysis
Successful strategists take pains in scouting competitors Understanding their strategies
Watching their actions
Evaluating their vulnerability to driving forces and competitive pressures
Sizing up their resource strengths and weaknesses and their capabilities
Trying to anticipate rivals next moves
Predicting Moves of Rivals
Predicting rivals next moves involves Analyzing their current competitive positions
Examining public pronouncements about what it will take to be successful in industry
gathering information from grapevine about current activities and potential changes
Studying past actions and leadership
- Determining who has flexibility to make major strategic changes and who is locked into pursuing same basic strategy
Question 6: What are the Key Factors for Competitive Success?
KSFs are competitive elements that most affect every industry members ability to prosper in the market place Specific strategy elements
Product attributes
Resources
Competencies
Competitive capabilities
KSFs spell difference between
Profit and loss
Competitive success or failure
Identifying Industry Key Success Factors
Answers to three questions pinpoint KSFs On what basis do customers choose between competing brands of sellers?
What must a seller do to be competitively successful what resources and competitive capabilities does it need?
What does it take for sellers to achieve a sustainable competitive advantage?
KSFs consist of the 3 5 really major determinants of financial and competitive success in an industry
Common Types of Key Success Factors
Technology related
Manufacturing related
Distribution related
Marketing related
Skills related
Organizational related
Others
Example: KSFs for Beer Industry
Utilization of brewing capacity to keep manufacturing costs low
Strong network of wholesale distributors to gain access to retail
Clever advertising to induce beer drinkers to buy a particular brand
Example: KSFs for Apparel Manufacturing Industry
Fashion design to create buyer appeal
Low cost manufacturing efficiency to keep selling prices competitive
Example: KFs for Tin and Aluminum Can Industry
Locating plants close to end-use customers to keep costs of shipping empty cans low
Ability to market plant output within economical shipping distances
Strategic Management Principle
A sound strategy incorporates efforts to be competent on all industry key success factors and to excel on at least one factor!
Question 7: Is the Industry Attractive or Unattractive and Why?
Objective
Develop conclusions about whether the industry and competitive environment is attractive or unattractive, both near and long-term, for earning good profits
Principle
Firms uniquely well-suited in an otherwise unattractive industry can, under certain circumstances, still earn unusually good profits
Things to Consider in Assessing Industry Attractiveness
Industrys market size and growth potential
Whether competitive conditions are conducive to rising/falling industry profitability
Will competitive forces become stronger or weaker
Whether industry will be favorably impacted by driving forces
Potential for entry/exit of major firms
Stability/dependability of demand
Severity of problems facing industry
Degree of risk and uncertainty in industrys future
Conducting an Industry and Competitive Situation Analysis
Two things to keep in mind:
Evaluating industry and competitive conditions cannot be reduced to a formula-like exercise-thoughtful analysis is essential
Sweeping industry and competitive analyses to be done every 1 to 3 years
Looking Back
What is the meaning of an opportunity and a threat in terms of external environmental analysis?
What are the five interrelated activities of a continuous process of external environmental analysis?
What are the five environmental segments of the macro environment?
What are Michael Porters Five Forces that he identified as important when doing industry analysis?
What aspects can be regarded as entry barriers?
What are the specific conditions that contribute to intense competition among existing competitors?
When are suppliers powerful?
When do buyers have bargaining power?
What are key success factors?
Key Terms
Opportunity - Political environment
Threat - Social environment
Economic environment - Technological
Industry Analysis - Key success Factors
Market environment
CHAPTER 4
EVALUATING COMPANY RESOURCES AND COMPETITIVE CAPABILITIES
Understand what really makes a company tick (Charles R Scott)
If a Company is not best in the world at a critical activity, it is sacrificing competitive advantage by performing that activity with its existing techniques (James Brian Quinn)
Chapter Outline
Determining how well the companys present strategy is working
SWOT Analysis
Resources strengths and weaknesses
Opportunities and threats facing firm
Strategic cost analysis and value chains
Assessing firms competitive position
Identifying strategic issues
Company Situation Analysis: The Key Questions
How well is firms present strategy working?
What are the resource strengths and weaknesses and its external opportunities and threats?
Are firms prices and costs competitive?
How strong is firms competitive position relative to rivals?
What strategic issues does firm face?
Question 1: How well is the Present Strategy Working?
Two steps involved
Determine current strategy of company
Examine key indicators of strategic and financial performance
What is the Strategy
Identify competitive approach Low-cost leadership
Differentiation
Focus on a particular market niche
Determine competitive scope Stages of industrys production/distribution chain
Geographic coverage
Customer base
Identify functional strategies
Examine recent strategic moves
Key Indicators of How Well the Strategy is Working
Trend in market share
Trend in profit margins
Trend in net profits, return on investment and EVA
Trend in sales growth
Credit ranking
Trend in stock price and stockholder value
Leadership role(s) technology, quality etc
Competitive advantages or disadvantages
Question 2: What are the firms strengths, Weaknesses, Opportunities and threats?
SWOT represents the first letter in Strengths
Weaknesses
Opportunities
Threats
Strategy-making must be well-matched to both A firms resource strengths and weaknesses
- A firms best market opportunities and external threats to its well-being
Identifying Resource Strengths and Competitive Capabilities
A strength is something a firm does well or a characteristic that enhances its competitiveness Valuable competencies or know how
Valuable physical assets
Valuable human assets
Valuable organizational assets
Valuable intangible assets
Important competitive capabilities
An attribute that places a company in a position of market advantage
Alliances or cooperative ventures
SWOT Analysis What to Look for
Potential Resource strengths Potential Resource Weaknesses Potential Company Opportunities
Potential External threats
Identifying Resource Weaknesses and Competitive Deficiencies
A weakness is something a firm lacks, dies poorly, or a condition placing it at a disadvantage
Resource weaknesses relate to
Deficiencies in know-how or expertise or competencies
Lack of important physical, organizational or intangible assets
Missing capabilities in key areas
Competencies vs. Core Competencies vs. Distinctive Competencies
A competence is an internal activity that a company performs better than other internal activities
A core competence is a well-performed internal activity that is central not peripheral to a companys strategy, competitiveness and profitability
A distinctive competence is a competitively valuable activity that a company performs better than its rivals
Core Competencies: A Valuable Company Resource
A competence becomes a core competence when the well-performed activity is central to the companys strategy, competitiveness and profitability
Often a core competence results from collaboration among different parts of an organization
Typically, core competencies reside in a companys people not in its assets on the balance sheet
A core competence gives a company a potentially valuable competitive capability
Types of Core Competencies
Skills in manufacturing a high quality product
System to fill customer orders accurately and swiftly
Fast development of new products
Better after-sale service capability
Superior know-how in selecting good retail locations
Innovativeness in developing popular product features
Merchandising and product display skills
Expertise in an important technology
Expertise in integrating multiple technologies to create whole families of new products
A Distinctive Competence A Competitively Superior Resource
A distinctive competence is a competitively significant activity that a company performs better than its competitors
A distinctive competence represents a competitively superior resource strength
A distinctive competence
Represents a competitively valuable capability that rivals do not have
Has potential for being a cornerstone of strategy
Can provide a competitive edge in the marketplace
Strategic Management Principle
A Distinctive competence empowers a company to build competitive advantage
Strategic Management Principle
A Distinctive competence empowers a company to build competitive advantage
Examples: Distinctive Competencies
Sharp Corporation Expertise in flat-panel display technology Toyota, Honda, Nissan Low cost, high-quality manufacturing capability and short design-to-market cycles Intel Ability to design and manufacture ever more powerful microprocessors for PCs Motorola Defect-free manufacture (six-stigma quality) of cell phone
Determining the Competitive Value of a Company Resource
There are 4 tests of whether a resource has real potential for producing sustainable competitive advantage
Is the resource hard to copy?
Does the resource have staying power is it durable?
Is the resource really competitively superior?
Can the resource be trumped by the different capabilities of rivals?
Strategic Management Principle
Successful strategies seek to capitalize on a companys resource strengths its expertise, core competencies, and strongest competitive capabilities
Identifying a Companys Market Opportunities
The market opportunities most relevant to a company are those offering The best prospects for profitable long-term growth
Comparative advantage
- Good match with its financial and organizational resource capabilities
Strategic Management Principle
A company is well advised to pass on a particular market opportunity unless it has, or can build the resource capabilities to capture it!
Identifying External Threats
Emergence of cheaper/better technologies
Introduction of better products by rivals
Intensifying competitive pressures
Onerous regulations
A rise in interest rates
Potential of a hostile takeover
Unfavorable demographic shifts
Adverse shifts in foreign exchange rates
Political upheaval in a country/unrest
Strategic Management Principle
Successful strategists aim at capturing a companys best growth opportunities and creating defenses against external threats to its competitive position and future performance!
Role of SWOT Analyzing Crafting a Better Strategy
Developing a clear understanding of a companys Resource strengths
Resource opportunities
Best opportunities
External threats
Drawing conclusions about how best to deploy resources in light of the companys internal and external situation
Thinking strategically about how to strengthen the companys resources base for the future
Question 3: Are the Companys Prices and Costs Competitive?
Assessing whether a firms costs are competitive with those of rivals is a crucial part of company analysis
Key analytical tools
Strategic cost analysis
Value chain analysis
Benchmarking
Why Rival Companies have Different Costs
Companies do not have the same costs because of differences in Prices paid for raw materials, component parts, energy and other supplier resources
Basic technology and age of plant & equipment
Economies of scale and experience curve effects
Wage rates and productivity levels
Marketing, promotion, and administration costs
Inbound and outbound shipping costs
- Forward channel distribution costs
Principle of Competitive Markets
The higher a companys costs are above those of close rivals, the more competitively vulnerable it becomes!
What is Strategic Cost Analysis?
Focuses on a firms costs relative to its rivals
Compares a firms costs activity by activity against costs of key rivals
From raw materials purchase to
Price paid by ultimate customer
Pinpoints which internal activities are a source of cost advantage or disadvantage
The Value Chain Concept
Identifies the separate activities and business processes performed to design, produce, market, deliver and support a product/service
Consists of two types of activities
Primary activities
Support activities
Typical Company Value Chain
Primary Activities
Support
Activities
& Costs
Activity-Based Costing: A Key Tool on Strategic Cost Analysis
Determining whether a companys cost are in line with those of rivals requires measuring how a companys costs with those of rivals activity-by-activity from one end of the value chain to the other
This requires having accounting data that measures the cost of each value chain activity
Activity-based accounting systems provide a way of measuring costs for each relevant value chain activity
Traditional Cost Accounting Vs Activity-Based Costing
Benchmarking the Costs of Key Value Chain Activities
Focuses on cross-company comparisons of how well activities are performed Purchase of materials
Payment of suppliers
Management of inventories
Training of employees
Processing of payrolls
Getting new products to market
Performance of quality control
Filling and shipping of customer orders
Objectives of Benchmarking
Determine whether a company is performing particular value chain activities efficiently
Understand the best practices in performing an activity
Assess if costs are in line with competitors
Learn how lower costs are achieved
Take action to improve cost competitiveness
Ethical Standards in Benchmarking: Dos and Donts
Avoid talk about pricing or competitively sensitive costs
Dont ask for sensitive data
Dont share proprietary data without clearance
Have impartial third party assemble and present competitive data with no names attached
Dont disparage a rivals business to outsiders based on data obtained
What Determines Whether a Company is Cost Competitive?
A companys cost competitiveness depends on how well managers its value chain relative to competitors
Three areas contribute to cost differences
Suppliers activities
The companys own internal activities
Forward channel activities
The Value Chain System
Assessing a companys cost competitiveness involves comparing costs all along the industrys value chain
Suppliers value chains are relevant because
Costs, quality and performance of inputs provided by suppliers influence a firms own costs and product performance Forward channel allies value chains are relevant because Forward channel allies costs and margins are part of price paid by ultimate end-user
- Activities performed affect end-user satisfaction
The Value Chain System
Upstream A Companys Downstream
Value Chains Own Value Chain
Value Chain
Activities, Internally Performed Activities, Costs & Buyer/User
Costs, & Activities, Costs Margins of Forward Value Chains
Margins of Margins Channel Allies &
Supplier Strategic Partners
Example: Key Value Chain Activities
PULP & PAPER INDUSTRY
Timber farming
Logging
Pulp mills
Paper making
Printing & Publishing
Example: Key Value Chain Activities
SOFT DRINK INDUSTRY
Processing of basic ingredients
Syrup manufacture
Bottling and can filing
Wholesale distribution
Retailing
Example: Key Value Chain Activities
HOME APPLIANCE INDUSTRY
Parts & components manufacture
Assembly
Wholesale distribution
Retail sales
Example: Key Value Chain Activities
COMPUTER SOFTWARE INDUSTRY
Programming
Disk loading
Marketing
Distribution
Correcting Supplier-Related Cost Disadvantages: The Options
Negotiate more favorable prices with suppliers
Work with suppliers to help them achieve lower costs
Integrate backward
Use lower-priced substitute inputs
Do a better job of managing linkages between suppliers value chains and firms own chain
Make up difference by initiating cost savings in other areas of value chain
Correcting Forward Channel Cost Disadvantages: The Options
Push for more favorable terms with distributors and other forward channel allies
Work closely with forward channel allies and customers to identify win-win opportunities to reduce costs
Change to a more economical distribution strategy
Make up difference by initiating cost savings earlier in value chain
Correcting Internal Cost Disadvantages: The Options
Reengineer how the high-cost activities or business processes are performed
Eliminate some cost-producing activities altogether by revamping value chain system
Relocate high-cost activities to lower-cost geographic areas
See if high cost activities can be performed cheaper by outside vendor/suppliers
Invest in cost-saving technology
Simplify product design
Make up difference by achieving savings in backward or forward portions of value chain system
From Value Chain Analysis to Competitive Advantage
The Strategy making lesson of value chain analysis:
Sustainable competitive advantage can be created by
Managing value chain activities better than rivals and
Developing distinctive capabilities to serve customers!
From Value Chain Analysis to Competitive Advantage
A company can create competitive advantage by managing its value so as to Integrate the knowledge and skills of employees in competitively valuable ways
Leverage economies of learning / experience
Coordinate related activities in ways that build valuable capabilities
Build dominating expertise in a value chain activity critical to customer satisfaction or market success
Question 4: How Strong is the Companys Competitive Position?
Can be firms position be expected to improve or deteriorate present strategy is continued
How the firm ranks relative to key rivals on each industry KSF and relevant measure of competitive strength
Whether the firm has a sustainable competitive advantage or disadvantage
Ability of firm to defend its position in light of
Industry driving forces
Competitive pressures
Anticipated moves of rivals
Assessing A Companys Competitive Strength versus Key Rivals
List industry key success factors and other relevant measures of competitive strength
Rate firm and key rivals on each factor using rating scale of 1 10 (1 = weak; 10 = strong)
Decide whether to use a weighted or unweighted rating system
Sum individual ratings to get overall measure of competitive strength for each rival
Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage
Why Do a Competitive Strength Assessment?
Reveals strength of firms competitive position
Shows how firm stacks up against rivals measure-by-measure pinpoints the companys competitive strengths and competitive weaknesses
Indicates whether firm is at a competitive advantage/ disadvantage against each rival
Identifies possible offensive attacks (pit company strengths against rivals weaknesses)
Identifies possible defensive actions (a need to correct competitive weaknesses)
Question 5: What Strategic Issues does the Company Need to Address?
What should management be worried about what items should be on the companys worry list?
Requires thinking strategically about
The pluses and minuses in the industry and competitive situation
The companys resource strengths and weaknesses and the attractiveness of its competitive position
A good strategy must address each and every strategic issue!
Identifying the Strategic Issues
Is present strategy adequate in light of competitive pressures and driving forces?
Is the strategy well matched to the industrys key success factors?
Does the company need new or different resource strengths and competitive capabilities
Does present strategy adequately protect against external threats and resource deficiencies?
Is firm vulnerable to competitive attack by rivals?
Where are strong/weak spots in present strategy?
Stating the Issues Clearly and Precisely
A well stated issue involves such phrases as What should be done about ?
How to ..?
Whether to ..?
Should we ?
Issues need to be precise, specific and cut straight to the chase
Issues raise questions about
What actions need to be considered?
What to think about doing
Criticisms of the SWOT Analysis
It generates lengthy lists
It uses no weight to reflect priorities
It uses ambiguous words and phrases
The same factor can be placed in two categories (e.g. a strength may also be a weakness)
There is no obligation to verity opinions with data or analysis
There is no logical link to strategy implementation
SWOT Analysis by itself, is not a panacea
Looking Back
What is the meaning of the acronym SWOT?
Explain the relationship between resources and organizational capabilities, SWOT analysis and strategic competitiveness.
The activities in the value chain are grouped into which two categories?
What are the limitations of the SWOT analysis?
What are the characteristics that make a resource valuable?
What is strategic intent?
Why is it important for a company to keep track of its competitors costs?
What are common types of core competencies?
Key Terms
Present strategy
Situation Analysis
Resource strength
Competence
Core competence
Distinctive competence
CHAPTER 5
STRATEGY AND COMPETITIVE ADVANTAGE
The essence of strategy lies in creating tomorrows competitive advantages faster than competitors mimic the ones you possess today. (Gary Hamel and C.K Prahald)
Strategies for taking the hill wont necessarily hold it. (Amar Bhide)
Chapter Outline
Generic Competitive Strategies Low cost leadership strategy
Broad differentiation strategies
Best cost provider strategies
Focused low-cost strategies
Focused differentiation strategies
Vertical integration strategies
Cooperative strategies (alliances)
Offensive and defensive strategies
First-mover advantages and disadvantages
Strategy and Competitive Advantage
Competitive Advantage exists when a firms strategy gives it an edge in Defending against competitive forces and
Securing customers
Key to Success
Convince customers firms product/service offers SUPERIOR VALUE Offer buyers a good product at lower price
- Use differentiation to provide a better product buyers think is worth a premium price
What is Competitive Strategy?
Consists of business approaches to Attract customers, fulfilling their expectations
Withstand competitive pressures
Strengthen market position
Includes offensive and defensive moves toCounter actions of key rivals
Shift resources to improve long-term market position
Respond to prevailing market conditions
Narrower in scope than business strategy
Objectives of Competitive Strategy
Build a COMPETITIVE ADVANTAGE
Cultivate clientele of LOYAL CUSTOMERS
Knock the socks off rivals, ethically and honorably
The Five Generic Competitive Strategies
Type of Advantage Sought
Low cost differentiation
Market Broad Range
Target of Buyers
Narrow
Buyer
Segment/Niche
A low-cost Leadership Strategy
Objective
Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to Under-price rivals and reap market share gains OR
- Earn higher profit margin selling at going price
Low-Cost Leadership
Keys to Success
Make achievement of low-cost relative to rivals the THEME of firms business strategy
Find ways to drive costs out of business year-after-year
Low-Cost Leadership means low OVERALL costs, not just low manufacturing or production costs!
Approaches to Securing a Cost Advantage
Approach 1
Do a better job than rivals of performing value chain activities efficiently and cost effectively
Approach 2
Revamp value chain to bypass some cost-producing activities
Approach 1: Controlling the Cost Drivers
Capture scale economies: avoid scale diseconomies
Capture learning and experience curve effects
Manage costs of key resource inputs
Consider linkages with other activities in value chain
Find sharing opportunities with other business units compare vertical integration vs. outsourcing
Assess first-mover advantages vs. disadvantages
Control percentage of capacity utilization
Make prudent strategic choices related to operations
Approach 2: Revamping the Value Chain
Simplify product design
Offer basic, no-frills products/service
Shift to a simpler, less capital-intensive or more streamlined technological process
Find ways to bypass use of high-cost raw materials
Use direct-to-end user sales/marketing approaches
Relocate facilities closer to suppliers or customers
Reengineering core business processes be creative in finding ways to eliminate value chain activities
Use PC technology to delete works steps, modify processes cut out cost-producing activities
Characteristics of a low-cost Provider
Cost conscious corporate culture
Employee participation in cost-control efforts
Ongoing efforts to benchmark costs
Intensive scrutiny of budget requests
Programs promoting continuous cost improvement
Successful low-cost producers champion frugality (not wasteful) but wisely and aggressively invest in cost-saving improvement
What Company Managers have to do to Achieve low-cost Leadership
Scrutinize each cost creating activity, identifying cost drivers
Use knowledge about cost drivers to manage costs of each activity down year after year
Find ways to reengineer how activities are performed and coordinated eliminate unnecessary work steps
Be creative in cutting some activities out of value chain system re-invent the industry value chain
The Competitive Strengths of low-cost Leadership
Better positioned than RIVAL COMPETITORS to complete offensively on basis of price
Low-cost provides some protection from bargaining leverage of powerful BUYERS
Low-cost provides some protection from bargaining leverage of powerful SUPPLIERS
Low-cost providers pricing power acts as a significant barrier for POTENTIAL ENTRANTS
Low cost puts a company in position to use low price as a defense against SUBSTITUTES
Low-Cost Strategy Works Best When:
Price competition is vigorous
Product is standardized or readily available from many suppliers
There are a few ways to achieve differentiation that have value
Most buyers use product in same ways
Buyers incur low switching costs
Buyers are large and have significant bargaining power
Pitfalls of low-cost Strategies
Being overly aggressive in cutting price (revenue erosion of lower price is not offset by gains in sales volume-profits go down, not up)
Low cost methods are easily limited by rivals
Becoming too fixated on reducing costs and ignoring
Buyer interest in additional features
Declining buyer sensitivity to price
Changes in how the product is used
Technological breakthroughs open up cost reductions for rivals
Differentiation Strategies
Objective
Incorporate differentiating features that cause buyers to prefer firms product or service over the brands of rivals
Keys to Success
Find ways to differentiate that CREATE VALUE for buyers and that are not easily matched or cheaply copied by rivals
Not spending more to achieve differentiation than the price premium that can be charged
The Appeal of Differentiation Strategies
A powerful competitive approach when uniqueness can be achieved in ways thatBuyers perceive as valuable
Rivals find hard to match or copy
Can be incorporated at a cost well below the price premium that buyers will pay
The Benefits of Successful Differentiation
A product/service with unique and appealing attributes allows a firm to
Command a premium price and/or
Increase unit sales and/or
Build brand loyalty
= Competitive Advantage
Types of Differentiation Themes
Unique taste Dr Pepper
Special features America Online
Superior service FedEx, Ritz-Carlton
Spare parts availability Caterpillar
More for your money McDonalds, Wal-Mart
Engineering design and performance Mercedes
Prestige Rolex
Quality manufacture Honda, Toyota
Technological leadership 3M Corporation, Int