strategy primer
DESCRIPTION
Basics of StrategyTRANSCRIPT
STRATEGIC
MANAGEMENT FOR
BATCH 2013-15
What is Strategy? – 1/2
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Word Origin :
Greek word Strategia, office of a general; linked to Strategos and means
‗the science and art of using all the forces of a nation to execute approved plans
as effectively as possible during peace or war‘; strategy thus refers to deployment of
troops; Once the enemy has been engaged, attention shifts to tactics!
The concept of strategy has been borrowed from the military and adapted
for use in business. Substitute the troops with resources and you get business
strategy!
Together, strategy and tactics bridge the gap between goals and means. In
other words, the ways and means of defining and achieving goals is what is called
strategy. It is the reflection of a company‘s game plan
What is Strategy? – 2/2
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• Strategy is a plan for getting from here to there.
• Strategy is a pattern in actions over time
• Strategy is a position, that reflects your business decisions
• Strategy is perspective, of a business problem and its solution
How is strategy different from tactic?
Strategy is a general framework that provides guidance for actions to be
taken and, at the same time, is shaped by the actions taken(tactics). While strategy
changes something for good, tactics can quickly degenerate into nothingness. The
right strategy makes any tactic work better. While strategy is intuitive, tactics are
instinctive!
Eg: Google‘s strategy is to maximize traffic by providing free services
Some of its tactics range from launch of Google Chrome and acquisition of
You-Tube to development of new technologies like Picasa, Google Docs and
Android apps
The process of Strategy formulation
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Vision and Mission
• Who we Are
• Who we want to be
Environment Scanning
• PEST
• Porter‘s 5 Forces
• SWOT Analysis
Strategy Formulation
• Generic Strategies
Implementation
• Diamond Framework
• Ansoff Matrix
Evaluation & Control
• BCG Matrix
• GE Matrix
Vision & Mission Statement
5
The first step in strategy formulation form a firm is deciding it‘s Vision & Mission
statements. There are certain core ideals that remain relatively steady for a company
and provide guidance in the process of strategic decision-making. These unchanging
ideals form the business vision and are expressed in the company‘s mission
statement
The mission statement communicates the firm's core ideology and visionary goals,
generally consisting of the following three components:
1. Core values, to which the firm is committed
2. Core purpose of the firm and
3. Visionary goals, the firm will pursue to fulfill its mission
Simply put, these act as the goals for the firm. Without this, strategy formulation
becomes meaningless.
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A B C D E F G H
Vision & Mission Statement - Exercise
6
1. To bring inspiration and innovation to every athlete in the world
2. To be the world's best quick service restaurant experience
3. To refresh the world & inspire moments of optimism and happiness
4. Every Home… Everywhere… with Pride, Passion and Performance
5. To be the most successful & respected lift truck company in U.S
6. To build a place where people can come to find and discover anything they
might want to buy online
7. To be the world leader in transportation products & related services
8. Helping People Around the World Eat and Live Better
Match the following Vission & Mission statements to the respective companies:
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Vision & Mission Statement – Answers
7
1. To bring inspiration and innovation to every athlete in the world
2. To be the world's best quick service restaurant experience
3. To refresh the world & inspire moments of optimism and happiness
4. Every Home, Everywhere with Pride, Passion and Performance
5. To be the most successful & respected lift truck company in U.S
6. To build a place where people can come to find and discover anything
they might want to buy online
7. To be the world leader in transportation products & related services
8. Helping People Around the World Eat and Live Better
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Environmental Scanning
8
Once the vision & mission statements have been framed, it is imperative to
do environmental scanning before the formulation of strategy. It is to be done at three
levels.
• Macro Environment – Using PEST Analysis
• Industry Analysis – Using Porter‘s 5 Force
• Internal Firm‘s Analysis – Using SWOT Analysis
Based on the analysis, the strategy can be formulated, along the lines of the
Generic Strategies prescribed by Porter.
We shall see each of these models one by one
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9
PEST analysis deals with the analysis of macro-environment that comprises Political,
Economic, Social and Technological factors. It can also be extended to PESTEL by
adding Environmental & Legal factors. The various factors that come under this
analysis are:
Political factors:
• Tax policy
• Employment laws
• Environmental regulations
• Trade restrictions and tariffs
• Political stability
Social Factors:
• Health consciousness
• Population growth rate
• Age distribution
• Career attitudes
• Emphasis on safety
Economic factors:
• Economic growth
• Interest rates
• Exchange rates
• Inflation rate
Technological:
• R&D activity
• Automation
• Technology incentives
• Rate of technological change
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PEST Analysis
Porter’s 5 Force – 1/2
10
The industry level analysis is usually done through Porter‘s 5 force framework. It
helps a firm to decide whether to enter an industry or not. Obviously, you would
realize that for an industry to be attractive for entry, you would want all these 5
aspects to be categorized as low. You may see in the next slide what constitutes
these 5 aspects in detail.
Supplier Power
Buyer Power
Threat of
Substitutes
Threat of
New Entrants Inter-firm Rivalry
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Porter’s 5 Force – 2/2
11
INTER-FIRM RIVALRY
Exit barriers; Industry
concentration; Fixed costs
Value added; Industry growth;
Intermittent overcapacity;
Product differences; Switching
costs; Brand identity; Diversity
of rivals; Corporate stakes;
SUPPLIER POWER
Supplier concentration; Importance of volume to supplier; Differentiation of inputs; Impact of
inputs on cost or differentiation; Switching costs of firms in the industry; Presence of substitute
inputs; Threat of forward integration; Cost relative to total purchases in industry;
THREAT OF NEW ENTRANTS
Barriers to Entry; Absolute cost
advantages; Proprietary learning
curve; Access to inputs;
Government policy; Economies of
scale; Capital requirements;
Brand identity; Switching costs;
Access to distribution; Expected
retaliation; Proprietary products;
THREAT OF
SUBSTITUTES
Switching costs;
Buyer inclination to
substitute; Price-
performance trade-
off of substitutes
BUYER POWER
Bargaining leverage; Buyer volume; Buyer information; Brand identity; Price sensitivity; Threat of
backward integration; Product differentiation; Buyer concentration vs. industry; Substitutes
available; Buyers' incentives
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12
Environmental factors internal to the firm usually can be classified as
strengths or weaknesses, and those external to the firm can be classified
as opportunities or threats. Now, try to classify the following cases as
Strength/Weakness/Opportunity/Threat:
a) Patents
b) Strong brand names
c) Good reputation among customers
d) Cost advantages from know-how
e) Easy access to natural resources
f) Favorable access to dist. networks
g) Lack of patent protection
h) Weak brand name
i) Poor reputation among customers
j) High cost structure
k) Lack of access to resources
l) Lack of access to dist. channels
m) Unfulfilled customer need
n) Arrival of new technologies
o) Loosening of regulations
p) Removal of trade barriers
q) Shifts in consumer tastes
r) Emergence of substitute products
s) New regulations
t) Increased trade barriers
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SWOT Analysis – 1/2
13
Strength (a- f) Weakness (g-m)
Opportunity (n-p) S-O Strategy W-O Strategy
Threat (q-t) S-T Strategy W-T Strategy
Answer: Strengths: a to f ; Weakness: g to m;
Opportunity: n to p; Threats: q to t;
Based on the SWOT analysis, you can adopt 4 types of strategies:
• S-O Strategy: Pursue Opportunities that aligns to company‘s strength
• W-O Strategy: Overcome weaknesses to pursue opportunities
• S-T Strategy: Use your strength to mitigate threats
• W-T Strategy: Prevent weaknesses from enhancing threats
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SWOT Analysis – 2/2
Generic Strategies
14
As per Michael Porter, a firm's strengths ultimately falls into one of the two: strategies – cost
advantage and differentiation. By applying these strengths in either a broad or narrow scope,
three generic strategies result: cost leadership, differentiation, and focus. These are called
generic strategies. Obviously, firms following differentiation would be able to
Low Cost Unique Product
Advantage
Bro
ad
M
arr
ow
Ma
rke
t
Cost
Leadership Differentiation
Focused Cost
Leadership
Focused
Differentiation
Try to fit the following firms into one of the four
generic strategies:
charge a premium over the others and a
focused differentiator, even more.
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Generic Strategies
15
Low Cost Unique Product Advantage
Bro
ad
Marr
ow
Mark
et
Cost Leadership Differentiation
Focus
Cost Leadership
Focus
Differentiation
If a firm selects more than one approach, and fails to achieve, then the firm
might get stuck in the middle without any competitive advantage.
Answer:
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Other useful models
16
A number of models have been developed for use in strategy formulation and
implementation. Here, we will try and understand what these models are and where
to use them
BCG Matrix:
Developed by the Boston Consulting Group, these is used in Resource
Allocation problem
Igor Ansoff Matrix:
This helps us to get clarity in the correct growth strategy to be adopted,
based on the present and future scenarios.
Diamond Framework:
This helps us to understand the National Competitive Advantage for
establishing a particular industry in a country.
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Resource Allocation – BCG Matrix – 1/2
17
The BCG matrix provides a framework for allocating resources among different
business units and allows one to compare many business units at a glance.
Conventional strategic thinking suggests there are four possible strategies for each
SBU:
High Low Market Share
Hig
h
Low
G
row
th R
ate
Stars Question
Marks
Cash Cows Dogs
1. Hold – Hold on to your star product with
sufficient resources
2. Harvest – Allocate sufficient resources
to get maximum profits from cash cows
3. Divest – Divest resources from Dogs,
which cannot be converted to Cash
Cows or Question marks
4. Build – Invest heavily in question marks
which can be converted into Stars
If you consider various types of T.V or monitors,
what category will each of these fall into:
LCD 22‖, LCD 19‖, LCD 27‖, CRT Monitor
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18
High Low
Market Share
Hig
h
Lo
w
Gro
wth
Ra
te
Stars Question Marks
Cash Cows Dogs
LCD 27‖
LCD 19‖
LCD 22‖
CRT Monitor
Answer
• LCD 19‖, which has been
and is being bought by most of
the users and matured will be
the cash cow
• LCD 22‘, which is being
sought after currently will be
the Star
• LCD 27‖, which is not
affordable by all currently, but
could become a star if the
prices come down or the
purchasing power goes up is a
question mark
• CRT Monitor which has
become outdated and has no
demand is a Dog
We should also note that the same product can
be in different category at different stages of its
life. For e.g., A star, after the market matures will
get converted to a cash cow
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Resource Allocation – BCG Matrix – 2/2
Growth Strategies - Igor Ansoff Matrix
19
Ansoff Matrix helps us to get clarity on the strategy to be adopted, when a firm
plans to expand . Try to fit the following examples into this matrix for a better
understanding of the four growth strategies.
1. Walt Disney, producing animation
movies, opening up theme parks and
vacation properties
2. Pepsi introducing Rs.5 bottles during
2003 Cricket world cup
3. APPLE – from I-Pod, I-pad to I-Mac
4. Domino‘s started in U.S in 1960 and
expanded to Canada in 1983. Today it
is present in 60 countries
Existing New Product
Exis
tin
g
Ne
w M
ark
et
Market
Penetration
New Product
Development
Market
Development Diversification
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20
Existing New Product
Exis
tin
g
Ne
w M
ark
et
Market Penetration New Product
Development
Market
Development Diversification
A company whose strength is
its customer base would go for New
Product Development and sell a
new products to the same customer,
while a company whose strength is
product specific will go for market
development
You may also realize that while market penetration could need least investment
of resources and carries least risk, diversification often requires higher investments
and is the most riskiest growth strategy.
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Growth Strategies - Igor Ansoff Matrix
Diamond Framework
21
Firm Strategy,
Structure and Rivalry
Factor
Conditions
Related & Supporting
Industries
Demand
Conditions
The diamond framework can be used to
illustrate the determinants of national
competitive advantage. In other words, it
explains why an industry thrives in a
particular country.
(You may find out more about these
components yourself)
Example:
1. IT industry in India
2. Fax Machines in Japan
It is important that a company planning
to expand in a particular county ensures
that these factors and the government,
would align and not interfere with its
growth strategy.
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Intended v/s Emergent Strategy
22
Citing Coca-Cola as an example, Daniel Akerson, CEO of General
Motors once told The Wall Street Journal that a GM car was just like the can
of Diet Coke he was drinking during the interview. "GM has to start acting
like a consumer-driven -- not [an] engineering-driven -- company, We sell a
consumer product -- our can just costs $30,000." Akerson had said. The result
was that GMs share price fell by around 33%
The above example is a perfect example of wrong strategy association.
Comparison of two different products, that too by a CEO sent shocking signals to
investors and the result was for everyone to see. What is worse is the fact that
many companies have adopted wrong strategies and miserably gone out of
business, leave alone a successful implementation of the intended strategy.
Hence, one should be ready to adapt/modify the strategy midway. These
emergent strategies have often proved more successful when compared to the
original intended strategy.
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Conclusion
23
There are many examples of failed strategies, probably more in number
than successful ones. Strategy is not some-thing that can be read in a text book
and implemented successfully as explained in it. Every strategy should be unique
and inimitable. It is this inimitability that gives you sustainable growth and
development.
Strategy should be seen, rather, as laying out the general path—but not
the precise steps—an organization will follow to create value. The essence of
being ―strategic‖ thus lies in a capacity for "intelligent trial-and error‖, rather than
linear adherence to finally honed and detailed strategic plans
Why then should we study Strategic Management?
Strategic Management helps you to align your thoughts into a logical
thought process that may help you in coming out with the right strategy. We read
so many examples of successful and failed strategies, that helps us decide
whether our intended strategy has the possibility of succeeding or not.
“Failures don't plan to fail; they fail to plan‖ - Harvey MacKay
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