Unit 4 sm

Strategic Planning

UNIT-IV NMBA-041

Strategic Planning

Strategic Planning is making decisions about:• Determining the organization’s mission;• Formulating policies to guide the organization in

establishing objectives, choosing a strategy, and implementing the chosen strategy;

• Establishing long-range and short-range objectives to achieve the organization’s mission;

• Determining the strategies that are to be used in achieving the organization’s mission

STRATEGIC ACTION PLANNING

SWOT Analysis

VISION

STRATEGIC AREAS FOR DEVELOPMENTSTRATEGIC OBJECTIVES

Strategic Action 4

Strategic Action 3

MISSION

Internal EnvironmentStrengthsWeaknesses- Value systems- Culture- Staffing- Support systems, operating environment

The long range objectives that will drive the development process and stretch the organization to achieve them.

External EnvironmentOpportunitiesThreats- The changing environment- The demand for new products- The economic environment- Availability of resources

Strategic Action 2

Strategic Action 1

EVALUATION/FEEDBACK

The reason for the existence of the organization & establishes the values, beliefs & guidelines for the conduct of business

Steps of a Strategic Plan• Where is your agency in its

development RIGHT now? • Assess the Internal and External

Environments– SWOT Analysis

S Str engths W Weaknesses Internal Environment

O Oppor tunities T Thr eats External Environment

Importance of Planning

• Most important function of management– The difference between higher profits or huge

loses, expansion or failure

• All managers are involved with planning in some way– Deciding to expand and build a new building to

deciding on work schedules

Importance of Planning• Mangers use their plans to determine whether the

business is making progress

• It encourages managers to be more specific in their decisions

• Planning in a large business is like a jigsaw puzzle. All the pieces must work together– Coordination to avoid conflict & missed opportunities – Sharing plans between departments helps each see how

their plans effect another

Levels of Planning

Managers plan on two levels• Strategic planning (upper management)– Long term– Provides broad goals & direction for the entire

business

• Operational (mid-level management)– Short term– Identifies specific activities for EACH area of the

business

Planning Tools

• Budgets – most widely used tool

• Schedules – deadlines

• Standards – Quality, Quantity, Time, Cost• Policies – general rule for the whole business

• Procedure – steps followed to perform certain work

• Research – Gathering information

Prentice Hall, Inc. © 2006 9-9

Strategy Implementation

Structure follows strategy –

– New strategy is created– New administrative problems emerge– Economic performance declines– New appropriate structure is invented– Profit returns to previous level



Stages of Corporate Development –

– Stage I: Simple structure– Stage II: Functional structure– Stage III: Divisional structure– Stage IV: Beyond SBU’s



Blocks to Changing Stages –

– Loyalty to comrades– Task oriented– Single-mindedness– Working in isolation

Organizational Life Cycle

Three levels of strategy in organizations—corporate, business, and functional strategies.

Corporate Directional Strategies

Corporate Strategy

Directional Strategy –

– 3 Grand Strategies

• Growth strategies

• Stability strategies

• Retrenchment strategies

Corporate Strategy

Growth Strategies --

– External mechanisms

• Mergers

• Acquisitions

• Strategic alliances

Corporate Strategy

Stability Strategies --

– Pause/proceed with caution

– No change

– Profit strategies

Corporate Strategy

Retrenchment Strategies --

– Turnaround– Captive Company Strategy– Selling out– Bankruptcy– Liquidation

Strategy methods

Three strategy methods

Mergers and acquisitions

•A merger is the combination of two previously separate organisations, typically as more or less equal partners.

•An acquisition involves one firm taking over the ownership (‘equity’) of another, hence

the alternative term ‘takeover’.

Integration in M&A

Integration in M&AApproaches to integration:

• Absorption – strong strategic interdependence and little need for organisational autonomy. Rapid adjustment of the acquired company’s strategies, culture and systems.

• Preservation – little interdependence and a high need for autonomy. Old strategies, cultures and systems can be continued much as before.

• Symbiosis – strong strategic interdependence, but a high need for autonomy. Both the acquired firm and acquiring firm learn and adopt the best qualities from each other.

• Holding – a residual category – with little to gain by integration. The acquisition will be ‘held’ temporarily before being sold on, so the acquired unit is left largely alone.

Strategic alliances

• A strategic alliance is where two or more organisations share resources and activities to pursue a strategy.

• Collective strategy is about how the whole network of alliances of which an organisation is a member competes against rival networks of alliances.

• Collaborative advantage is about managing alliances better than competitors.

What is meant by Strategic Alliance?

Definition 1:

An agreement between two or more individuals or entities stating that the involved parties will act in a certain way inorder to achieve a common goal. Strategic alliance usually make sense when the parties involved haveComplementary strengths.

Definition 2:

Strategic alliances are innovative and interesting forms of relationships between organizations. Organizations createalliances in their quest to compete against fast & nimble competitors.

What is Meant by Strategic Alliance? cont’d

Definition 3:

Strategic alliances are agreements between companies (partners) to reach objectives of a common interest. Alliancesare among the various options which companies can use to achieve their goals. They are based on cooperation betweencompanies.

Purposes of Strategic Alliances • Competition is shifting from a "firm versus firm perspective"

to a "supply chain versus supply chain perspective." Therefore, firms seeking competitive advantage are participating in cooperative supply chain arrangements, such as strategic alliances, which combine their individual strengths & unique resources.

• Enabling a firm to focus resources on its core skills & competencies while acquiring other components or capabilities it lacks from the marketplace.

• Alliances can often improve market power of a firm because either the alliance partner is a customer for the product or because the distribution channels & buying power of the partners can be combined

Purposes of Strategic Alliances cont’d

• Alliances enable buying & supplying firms to combine their individual strengths & work together to reduce non-value-adding activities & facilitate improved performance.

• In order for both parties to remain committed to this form of relationship, mutual benefit must exist (i.e. a "win-win" relationship)

Success Factors

• Selection:

– Strategically evaluate which upstream & downstream members should be included in the supply chain to create a highly competitive & efficient supply network.

– Selecting strategic partner should be based on company’s goals, objectives & values system.

– Select partners who have competencies in collaboration & those who already have a proven ability to work in a collaborative environment.

• Intention:

Both partners should acknowledge their mutual dependence & their willingness to work for the survival & prosperity of the relationship.

Success Factors cont’d

• Trust:

– Existence of trust in a relationship reduces perception of risk associated with opportunistic behavior as this generates greater profits & serve customers better

• Communication:

– Communication is critical for building successful relationships to achieve the benefits of collaboration as it allows partners to understand alliance goals, roles, responsibilities & helps with the sharing & dissemination of individual experiences

• Conflict Resolution:

– Firms should be motivated to engage in joint problem solving as they are, by definition, linked together to manage an environment that was more uncertain & turbulent than each one could control.

Types of Strategic Alliances

• Joint Venture: an agreement by two or more parties to form a single entity to undertake a certain project. Each of the businesses has an equity stake in the individual business and share revenues, expenses & profits.

• Outsourcing

• Global Strategic Alliances: working partnerships between companies (often more than 2) across national boundaries & increasingly across industries. Sometimes formed between company & a foreign government, or among companies & governments

Types of Strategic Alliances cont’d

• Equity strategic alliance: an alliance in which 2 or more firms own different percentages of the company they have formed by combining some of their resources & capabilities to create a competitive advantage.

• Non- equity strategic alliance: an alliance in which 2 or more firms develop a contractual-relationship to share some of their unique resources & capabilities to create a competitive advantage.

Types of Strategic Alliances cont’d

• R&D: Strategic alliances based around R&D tend to fall into the joint venture category, where two or more businesses decide to embark on a research venture through forming a new entity.

• Franchising: is an excellent way of quickly rolling out a successful concept nationwide. Franchisees pay a set-up fee & agree to ongoing payments so the process is financially risk-free for the company. However, downsides do exist, particularly with the loss of control over how franchisees run their franchise.

Examples of Alliances• Nokia and Microsoft in alliance to make Zune phone

• Star Alliance – Airlines alliances.

• Philips and Sony jointly launched the mini-CD.

• Nestlé and Fonterra Sign Agreement on Dairy Alliance for the America

• McDonald’s with Disney, Coca-Cola & Walmart

• Online grocer Webvan Group forms alliances with foodmakers: Kellogg, Nestle, Pillsbury, Quaker

Types of strategic alliance

There are two main kinds of ownership in strategic alliances:• Equity alliances involve the creation of a new

entity that is owned separately by the partners involved.• Non-equity alliances are typically looser, without the commitment implied by ownership.

Equity alliances • The most common form of equity alliance is the

joint venture, where two organisations remain independent but set up a new organisation jointly owned by the parents.

• A consortium alliance involves several partners setting up a venture together.

Non-equity alliances• Non-equity alliances are often based on

contracts.• Three common forms of non-equity alliance:

Franchising.Licensing.Long-term subcontracting.

Motives for alliances• Scale alliances – lower costs, more bargaining power

and sharing risks.• Access alliances – partners provide needed

capabilities (e.g. distribution outlets or licenses to brands)

• Complementary alliances – bringing together complementary strengths to offset the other partner’s weaknesses.

• Collusive alliances – to increase market power. Usually kept secret to evade competition regulations.

Strategic alliance processesTwo themes are vital to success in alliances:• Co-evolution – the need for flexibility and change

as the environment, competition and strategies of the partners evolve.

• Trust – partners need to behave in a trustworthy fashion throughout the alliance.

Comparing acquisitions, alliances and organic development

Key success factors

Portfolio Analysis

• Portfolio analysis– management views its product lines and business

units as a series of investments from which it expects a profitable return

Different Portfolio Models

There are different portfolio models. However, in this course, two of them will be discussed.

• The BCG growth-share matrix, introduced by the Boston Consulting Group.

• The business strength-industry attractiveness matrix associated with General Electric and McKinsey & Co.

FUNCTIONAL STRATEGIES

EVERY BUSINESS UNIT DEVELOPS FUNCTIONAL STRATEGIES FOR EACH MAJOR DEPARTMENT

• MARKETING STRATEGY

• FINANCIAL STRATEGY

• RESEARCH & DEVELOPMENT STRATEGY

• OPERATIONS STRATEGY

• PURCHASING STRATEGY

• LOGISTICS STRATEGY

• HUMAN RESOURCES STRATEGY

• INFORMATION TECHNOLOGY STRATEGY

BASIC MARKET-PRODUCT STRATEGIES THE CUSTOMER-PRODUCT DECISION

WHO IS OUR PRIMARY CUSTOMER?WHAT KIND OF PRODUCT DO WE INTEND TO OFFER?

CUSTOMERSEXISTING NEW

EXISTING - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

MARKET MARKET PENETRATION DEVELOPMENT

PRODUCTS OR - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

SERVICES PRODUCT DIVERSIFICATION DEVELOPMENT INNOVATION

NEW - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

MARKETING STRATEGIES: THE CUSTOMER-PRODUCT DECISION

MARKET PENETRATION STRATEGY(Stay in current markets with existing products)

INCREASE RATE OF PURCHASE/CONSUMPTIONATTRACT RIVAL’S CUSTOMERSBUY OUT RIVALSCONVERT NON-USERS INTO CURRENT USERS

MARKET DEVELOPMENT STRATEGY(Find new markets for current products)

ENTER NEW GEOGRAPHICAL MARKETSFIND NEW USES FOR EXISTING PRODUCTSFIND NEW TARGET MARKETS

PRODUCT DEVELOPMENT STRATEGY(Develop new products for existing markets)

IMPROVE FEATURESIMPROVE QUALITY/RELIABILITY/DURABILITYENHANCE AESTHETICS/STYLINGADD MODELS

DIVERSIFICATION STRATEGY(Develop new products for new markets)

BCG Growth—Share Matrix

Figure 7-3

BCG Matrix

• Question marks– new products with the potential for success but

need a lot of cash for development

• Stars– market leaders that are typically at or nearing the

peak of their product life cycle and are able to generate enough cash to maintain their high share of the market and usually contribute to the company’s profits

BCG Matrix

• Cash cows– products that bring in far more money than is

needed to maintain their market share

• Dogs– products with low market share and do not have

the potential to bring in much cash

BCG Matrix—Limitations

• Use of highs and lows to form categories is too simplistic.

• Link between market share and profitability is questionable.

• Growth rate is only one aspect of industry attractiveness.

• Product lines or business units are considered only in relation to one competitor.

• Market share is only one aspect of overall competitive position.

Advantages and Limitations of Portfolio Analysis

Advantages• Encourages top management to evaluate each of the

corporation’s businesses individually and to set objectives and allocate resources for each

• Stimulates the use of externally oriented data to supplement management’s judgment

• Raises the issue of cash flow availability to use in expansion and growth

Managing the Multibusiness Corporation

• Structure of the Multidivisional Companyo Theory of the M-formo The divisionalized firm in practice

• The Role of Corporate Management• Managing the Corporate Portfolio

o Portfolio planning techniqueso Value-creation through corporate

restructuring• Managing Individual Businesses• Managing Internal Linkages• Recent Trends

The Functions of Corporate Management

—Decisions over diversification, acquisition, divestment

—Resource allocation between businesses.

— Business strategy formulation —Monitoring and controlling business performance

—Sharing and transferring resources and capabilities

Managing linkages

between businesses

Managing theindividual businesses

Managing the Corporate Portfolio

The Development of Strategic Planning Techniques: General Electric in the 1970’s

Late 1960’s: GE encounters problems of direction, coordination, control, and profitability

Corporate planning responses: Portfolio Planning Models —matrix-based frameworks

for evaluating business unit performance, formulating business strategies, and allocating resources

Strategic Business Units —GE reorganized around SBUs (business comprising a strategically-distinct group of closely-related products

PIMS —a database which quantifies the impact of strategy on performance. Used to appraise SBU performance and guide business strategy formulation

Portfolio Planning Models: Their Uses in Strategy Formulation

• Allocating resources-- the analysis indicates both the investment requirements of different businesses and their likely returns

• Formulating business-unit strategy-- the analysis yields simple strategy recommendations (e.g..: “build”, “hold”, or “harvest”)

• Setting performance targets-- the analysis indicates likely performance outcomes in terms of cash flow and ROI

• Portfolios balance-- the analysis can assist in corporate goals such as a balanced cash flow and balance of growing and declining businesses.

H A R V E S T

H O L D

B U I L D

Low

Medium

High

Low Medium High

Indu

stry

Att

racti

vene

ss

Portfolio Planning Models: The GE/ McKinsey Matrix

Industry Attractiveness Criteria Business Unit Position - Market size - Market share (domestic,- Market growth global, and relative)- Industry profitability - Competitive position- Inflation recovery - Relative profitability- Overseas sales ratio

Business Unit Position

Corporate Parenting

• Corporate parenting– views a corporation in terms of resources and

capabilities that can be used to build business unit value as well as generate synergies across business units

Corporate Parenting

• Generates corporate strategy by focusing on the core competencies of the parent corporation and the value created from the relationship between the parent and its businesses

Developing a Corporate Parenting Strategy

1. Examine each business unit in terms of its strategic factors

2. Examine each business unit in terms of areas in which performance can be improved

3. Analyze how well the parent corporation fits with the business unit

INTRODUCTION

BOSTON CONSULTING GROUP (BCG) MATRIX is developed by BRUCE HENDERSON of the BOSTON CONSULTING GROUP IN THE EARLY 1970’s.

According to this technique, businesses or products are classified as low or high performers depending upon their market growth rate and relative market share.

MARKET SHARE• Market share is the percentage of the total market that is being

serviced by your company, measured either in revenue terms or unit volume terms.

• RELATIVE MARKET SHARE

• RMS = Business unit sales this year Leading rival sales this year

• The higher your market share, the higher proportion of the market you control.

MARKET GROWTHRATE

• Market growth is used as a measure of a market’s attractiveness.

• MGR = Individual sales - individual sales this year last year Individual sales last year • Markets experiencing high growth are ones where the total

market share available is expanding, and there’s plenty of opportunity for everyone to make money.

THE BCG GROWTH-SHARE MATRIX

• It is a portfolio planning model which is based on the observation that a company’s business units can be classified in to four categories:

Stars Question marks Cash cows Dogs

• It is based on the combination of market growth and market share relative to the next best competitor.

STARSHigh growth, High market share

• Stars are leaders in business.• They also require heavy investment, to

maintain its large market share.• It leads to large amount of cash consumption

and cash generation.• Attempts should be made to hold the market

share otherwise the star will become a CASH COW.

CASH COWS Low growth , High market share

• They are foundation of the company and often the stars of yesterday.

• They generate more cash than required.• They extract the profits by investing as little

cash as possible• They are located in an industry that is

mature, not growing or declining.

DOGSLow growth, Low market share

• Dogs are the cash traps.• Dogs do not have potential to bring in much

cash.• Number of dogs in the company should be

minimized.• Business is situated at a declining stage.

QUESTION MARKSHigh growth , Low market share

• Most businesses start of as question marks.• They will absorb great amounts of cash if

the market share remains unchanged, (low).• Why question marks?• Question marks have potential to become

star and eventually cash cow but can also become a dog.

• Investments should be high for question marks.

MAIN STEPS OF BCG MATRIX

• Identifying and dividing a company into SBU.• Assessing and comparing the prospects of

each SBU according to two criteria : 1. SBU’S relative market share. 2. Growth rate OF SBU’S industry.• Classifying the SBU’S on the basis of BCG

matrix.• Developing strategic objectives for each SBU.

BCG MATRIX WITH CASH FLOW

BENEFITS

• BCG MATRIX is simple and easy to understand.• It helps you to quickly and simply screen the

opportunities open to you, and helps you think about how you can make the most of them.

• It is used to identify how corporate cash resources can best be used to maximize a company’s future growth and profitability.

LIMITATIONS

• BCG MATRIX uses only two dimensions, Relative market share and market growth rate.

• Problems of getting data on market share and market growth.

• High market share does not mean profits all the time.

• Business with low market share can be profitable too.

PRACTICAL USE

• MAHINDRA & MAHINDRA• HLL• IES

BCG MATRIX

scorpio

Jeepbalero

CONCLUSION

Though BCG MATRIX has its limitations it is one of the most FAMOUS AND SIMPLE portfolio planning matrix ,used by large companies having multi-products.

Portfolio analysis

• BCG Growth-Share Matrix– question marks, dogs, cash cows, stars

• GE- Nine Cell Matrix

Gro

wth

Rat

eRelative Market Share

Stars QuestionMarks

CashCows Dogs

Boston Consulting Group Matrix

Gro

wth

Rat

e

Relative Market Share

1.0High Low

Soft Drinks

FritoLay

KFC

PizzaHut

TacoBell

Low

High

10%

BCG Matrix for PepsiCo - Early 1990s

Gro

wth

Rat

e

Relative Market Share

.75High Low

Soft Drinks

FritoLay

KFC

PizzaHutTaco

Bell

Low

High

5%

BCG Matrix for PepsiCo - Early 1990s

Competitive StrengthsA

ttra

ctiv

enes

s

Invest Grow

Low

High

LowHigh

HarvestDivest

Hold

GE 9 Cell Matrix

Competitive StrengthsA

ttra

ctiv

enes

s

Low

High

LowHigh

GE 9 Cell Matrix for Pepsico

Soft Drinks

Snack Foods

Portfolio Planning Models: Applying the BCG Matrix to BM Foods Inc.

Annu

al r

eal r

ate

of m

arke

t gr

owth

(%

)

Relative market share

2 1.5 1 0.50.1

-2

0

2

4

6

8

10

Frozen fooddivision

Fruit juicesdivision

Bakery division

Health foodsdivision

Current position Previous position. Area of circle proportional to $ sales.

Matrix uses business strength compared to

market attractiveness

Business strength (strong, average, or weak).

Market attractiveness (high, medium, low).

GE Multi-factor Matrix

High Low

High

Low

BUSINESS POSITIONM

ARKE

T AT

TRAC

TIVE

NES

SMedium

Medium

INVEST INVEST PROTECT

INVEST PROTECT HARVEST

PROTECT HARVEST DIVEST

The GEBusiness Screen

Market Attractiveness Matrix (GE)

BUSINESS POSITONSTRONG

MAR

KET

ATTR

ACTI

VEN

ESS

LOW

MED

IUM

HIGH

MEDIUM WEAK

Low Attractiveness

Medium Attractiveness

High Attractiveness

GE Nine CellAttractiveness/Strength Matrix

• Use quantitative measures of industry attractiveness and business strength to plot location of each business in matrix

• Each business unit appears as a circle• area of circle can represent relative size of industry

with pie slice showing the company’s market share

Indu

stry

(Pro

duct

-Mar

ket)

Attra

ctiv

enes

sBusiness Strength-Competitive PositionStrong Average Weak

High

Medium

Low

Winners

Winners Winners

ProfitProducers

AverageBusiness

Questionmarks

Losers Losers

Losers

McKinsey GE Stoplight Matrix

The Porter Competitive Model

Used to understand and evaluate the structure of an industry’s business environment and the threats of competition to a specific company.

Porter Competitive Model

Intra-Industry Rivalry

Strategic Business Unit

BargainingPower

of Buyers

Bargaining Power

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Two Strategic Objectives

• Create effective links with customers and suppliers

• Create barriers to new entrants and substitute products

Primary and Supporting Strategies

• Differentiation Strategy (Primary)• Low Cost Strategy (Primary)• Innovation (Supporting)• Growth (Supporting)• Alliance (Supporting)

Porter Competitive Model Tips

1. To incorrectly define the industry can cause major

problems in doing Section I of the analysis term paper.

2. You must identify the specific market being evaluated.

3. Your analysis company is the Strategic Business Unit.

4. Identify rivals by name for majors, by category for minor

rivals if needed to present the best possible profile of

rivals.

Porter Competitive Model

5. Be sure to address the power implications of both

customers and suppliers. Power buys them what?

6. Identify buyers and suppliers by categories versus companies.

7. Summarize your Porter Model analysis.

Strategic ChoicesCorporate Strategy and

Diversification

outcomes

• Identify alternative strategy options, including market penetration, product development, market development and diversification.

• Distinguish between different diversification strategies (related and conglomerate diversification) and evaluate diversification drivers.

outcomes

• Assess the relative benefits of vertical integration and outsourcing.

• Analyse the ways in which a corporate parent can add or destroy value for its portfolio of business units.

• Analyse portfolios of business units and judge which to invest in and which to divest.

Strategic directions andcorporate-level strategy

Strategic directions and corporate-level strategy

Corporate strategy directions

Corporate strategy directions

Diversification

• Diversification involves increasing the range of products or markets served by an organisation.

• Related diversification involves diversifying into products or services with relationships to the existing business.

• Conglomerate (unrelated) diversification involves diversifying into products or services with no relationships to the existing businesses.

Thanks

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