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By Prof Mahajan Samant
STRATEGIC MANAGEMENT
Business and Military Strategy
• Strategy from Greek “STRATEGOS”=> Military General.
• STRATOS (the army) and AGO (to lead)
WEBSTER’s new world Dictionary
• “The science of planning and directing large-scale
military operations, of maneuvering forces into the most
advantageous position prior to actual engagement with
the enemy”
Integrating Intuition and Analysis
• Strategic management process can be described as an
objective, logical, systematic approach for making major
decisions in organizations
WILL DURANT of General Motors
• ‘A man who would proceed on a course of action guided
solely as far as I could tell, by some intuitive flash of
brilliance. He never felt obliged to make an engineering
hunt for the facts. Yet at times, he was astoundingly
correct in his judgment.’ Alfred Sloan
ALBERT EINSTEIN
• ‘I believe in intuition and inspiration. At times I feel
certain that I am right while not knowing the reason.
Imagination is more important than knowledge, because
knowledge is limited, whereas imagination embraces the
entire world.’
PETER DRUCKER
• I believe in intuition only if you discipline it. ‘Hunch’
artists, who make a diagnosis but don’t check it out with
facts, are the ones in medicine who kill people, and in
management kill businesses’.
Ref:- Sun Tzu => “The art of war”=> 15 PRINCIPLES
• Know You + Know Enemy=> 100 battles but no defeat!
• Know You + Ignorant=> 50:50 Chance
• NIL + NIL => Sure defeat in each battle!
CHAPTER 1
CRAFTING And
EXECUTING STRATEGY
9
THREE KEY ISSUES
WHERE ARE WE NOW ?
?
WHERE DO WE WANT TO GO ?
WILL WE GET THERE ?
“STRATEGY”
•MANAGEMENT’S GAME PLAN
•FOR GROWING THE BUSINESS !?!
•FOR ACHIEVING TARGETED OBJECTIVES !
•FOR FUTURE!
CHIEF ELEMENTS OF SOUTH WEST AIRLINES STRATEGY
• GROW THE BUSINESS BY GRADUALLY ADDING MORE
FLIGHTS ON EXISTING ROUTES AND BY INITIATING
SERVICE TO NEW AIRPORTS
• MAKE FRIENDLY SERVICE A COMPANY TRADEMARK
• MAINTAIN AN AIRCRAFT FLEET OF ONLY BOEINGS 737s
• ENCOURAGE CUSTOMERS TO MAKE RESERVATIONS AND
PURCHASE TICKETS AT THE COMPANY’S WEB SITE
• AVOID FLYING INTO CONGESTED AIRPORTS, STRESSING
INSTEAD ROUTES BETWEEN MEDIUM-SIZED CITIES AND
SMALL AIRPORTS CLOSE TO MAJOR METROPOLITAN
AREAS
CHIEF ELEMENTS OF SOUTH WEST AIRLINES STRATEGY
• EMPLOY A POINT-TO-POINT ROUTE SYSTEM (AS COMPARED TO HUB-AND-SPOKE SYSTEM OF RIVAL CARRIERS
• ECONOMICS ON THE AMOUNT OF TIME IT TAKES TERMINAL PERSONNEL TO CHECK PASSENGERS IN AND ON-LOAD PASSENGERS
• ECONOMISE ON COSTS! {SHORT TURN-AROUND TIMES}
CHIEF ELEMENTS OF SOUTH WEST AIRLINES STRATEGY
MOST FREQUENTLY USED!…..FOUR STRATEGIC APPROACHES…
• BEING THE INDUSTRY’S LOW-COST PROVIDER (THERE BY GAINING A
COST-BASED COMPETITIVE ADVANTAGE)(E.G. WAL-MART, SOUTH WEST)
• OUT COMPETING RIVALS BASED ON SUCH DIFFERENTIATING FEATURES
AS HIGHER QUALITY. WIDER PRODUCT SELECTION, ADDED
PERFORMANCE, BETTER SERVICE, MORE ATTRACTIVE STYLING,
TECHNOLOGICAL SUPERIORITY, OR UNUSUALLY GOOD VALUE FOR
MONEY.
(J & J IN BABY PRODUCT, MERCEDES & BMW IN ENGINEERING DESIGN)
• FOCUSING ON A NARROW NICHE MARKET AND WINNING A
COMPETITIVE EDGE BY DOING A BETTER JOB THAN RIVALS OF
SERVING THE SPECIAL NEEDS AND TASTES OF NICHE BUYERS.
(E.G McAFEE)
• DEVELOPING EXPERTISE & RESOURCE STRENGTH THAT GIVES THE
COMPANY COMPETITIVE CAPABILITIES THAT RIVALS CAN’T EASILY
IMITATE OR TRUMP WITH CAPABILITIES OF THEIR OWN. (E.G
FEDEX …NEXT DAY DELIVERY IN SMALL PACKAGES, IBM ..LARGE
CORP SUPPORT)
MOST FREQUENTLY USED!…..FOUR STRATEGIC APPROACHES…
STRATEGY IS ..
PARTLY PROACTIVE
AND
PARTLY REACTIVE
“STRATEGY”
• EMERGES INCREMENTALY AND THEN EVOLVES OVER
TIME!
• CRAFTING STRATEGY CALLS FOR GOOD
ENTREPRENEURSHIP!
• STRATEGY & ETHICS : PASSING THE TEST OR MORAL
SCRUTINY
COMPANY’S STRATEGY AND BUSINESS MODEL
• ‘BUSINESS MODEL RELATES TO WHETHER THE
REVENUE(OST – PROFIT ECONOMICS OF ITS
STRATEGY DEMONSTRATES THE VIABILITY OF THE
BUSINESS ENTERPRISE AS A WHOLE
E.G. MICROSOFT Vs RED HAT LINUX
MICROSOFT Vs RED HAT LINUX
•DEVELOP PROPRIETORY
CODE KEEP SOURCE CODE
HIDDEN
•SELL TO P.C. AT
ATTRACTIVE PRICES, GET
LARGE UNIT SALES
•COLLABORATIVE
EFFORT OF VOLUNTEER
PROGRAMMERS FROM
WORLD!
•UPFRONT PRODUCTION
DEVELOPMENT COSTS!
•MOST COSTS ARE
FIXED SINCE FRONT
END DEVELOPMENT
•PROVIDE SUPPORT AT
NO COST
•MODEST FEE
•RELEASE UPGRADED AT
FREQUENCY!
•SOURCE CODE OPEN!
•SPECIALISED
EXPERTISE TRAINING
MICROSOFT Vs RED HAT LINUX
WHAT MAKES A STRATEGY - A WINNER ?
• HOW WELL THE STRATEGY FITS THE COMPANY’S
SITUATION?
• IS THE STRATEGY HELPING THE COMPANY ACHIEVE A
SUSTAINABLE COMPETITIVE ADVANTAGE ?
• IS THE STRATEGY RESULTING IN BETTER COMPANY
PERFORMANCE?
WHY ARE CRAFTING AND EXECUTING STRATEGY IMPORTANT ?
• THERE IS A COMPELLING NEED FOR MANAGERS TO
PROACTIVELY SHAPE OR CRAFT HOW THE
COMPANY’S BUSINESS WILL BE CONDUCTED
• A STRATEGY-FOCUSED ORGANISATION IS MORE
LIKELY TO BE A STRONG BOTTOM-LINE PERFORMER
GOOD MANAGEMENT=
GOOD STRATEGY +
GOOD STRATEGY EXECUTION
…………. EXERCISES………….
• www.redhat.com =>Business Model
THE MANAGERIAL PROCESS OF CRAFTING & EXECUTING STRATEGY…
CHAPTER 2
CRAFTING AND EXECUTING COMPANY STRATEGY
• DEVELOPING A STRATEGIC VISION
• SETTING OBJECTIVES… YARDSTICK FOR
MEASUREMENT
• CRAFTING A STRATEGY TO ACHIEVE DESIRED
OUTCOME
• IMPLEMENTING CHOSEN STRATEGY
• MONITORING DEVELOPMENTS & CORRECTIVE
ADJUSTMENTS
VISION
DEVELOPING A STRATEGIC VISION (ROADMAP)
• PRODUCT - CUSTOMER - MARKET - TECHNOLOGY
• E.G ‘CAR IN EVERY GARRAGE’…HENRY FORD
• “WHERE ARE WE GOING AND WHY?”
31
VISION
(ROADMAP)A vision or strategic intent is the desired future state of organization.
It is an aspiration around which a strategic perhaps a chief executive,might seek to focus the attention and energies of
members of the organization.
ANSWER THE QUESTION “WHAT DO WE WANT TO BECOME”“Our Vision is to take care of your vision”
Stokes Eye Clinic in Florence,South Carolina
It refers to category of intentions that are broad ,all inclusive and forward thinking.
32
V
VISION
MISSION
GOALS
OBJECTIVES
PLANS
MOST INTEGRATIV
E
MOST SPECIFIC
FEWEST IN NUMBER
GREATEST IN NUMBER
VISION
MISSION
• PRESENT BUSINESS SCOPE AND PURPOSE
• WHO WE ARE, WHAT WE DO, WHY WE ARE HERE
• DEFINED BY BUYER NEEDS . IT SEEKS TO SATISFY…
• (IDENTICAL) BUSINESS PURPOSE (POPULAR TERM)
• E.G “ GIVE OUR CUSTOMERS BEST FOOD & BEVERAGE
VALUES with WARMTH, FRIENDLINESS, FUN, PRIDE, &
CO.SPIRIT
…..TRADER JOE’S MISSION
34
MISSION•Of a business is the fundamental unique purpose that sets it apart from other firms of its type and identifies the scope of its operations in product and market terms.•Is a generalized statement of the overriding purpose of the organization.•Enduring statement of purpose that distinguish one business from other similar firms.•It addresses the basic question “What is our business” ?•It describes the values and priorities of an organization.•It compels strategists to think about the natureand scope of present operations and to assess the potential attractiveness of future markets and activities.•To create software for the personal computer that empowers and enriches people in workplace,school and at home. Eg. MICROSOFT•A vision becomes more tangible in the form of a mission statement.
LINKING VISION WITH VALUES
• VALUES, WE MEAN BELIEFS, BUSINESS PRINCIPLES, PRACTICES
INCORPORATED IN THE WAY THE COMPANY OPERATES AND
COMPANY PERSONNEL BEHAVE.
• VALUES RELATE TO INTEGRITY, ETHICS, INNOVATIVENESS,
EMPHASIS ON QUALITY OR SERVICE, SOCIAL RESPONSIBILITY
AND COMMUNITY CITIZENSHIP.
E.G “ DISCIPLINE, RISK-TAKING, QUALITY, CUSTOMER (INTEL)
ORIENTATION, RESULT ORIENTED ATMOSPHERE” CORE VALUES
COMMUNICATING THE STRATEGIC VISION
• A STONEMASON FINDS BUILDING A MAGNIFICIENT CATHEDRAL MORE INSPIRING THAN LAYING
STONES
• HENCE COMMUNICATING TO THE LOWER MOSTS!
• EXPRESS ESSENCE OF VISION IN SLOGAN
• E.G 1. SCOTLAND YARD
“TO MAKE LONDON SAFEST IN THE WORLD”
• E.G 2. MICROSOFT CORPORATION
“ EMPOWER PEOPLE THROUGH GREAT SOFTWARE-ANYTHING, ANY PLACE, AND ON ANY DEVICE.”
• BREAKING DOWN RESISTANCE TO A NEW VISION
• RECOGNISING STRATEGIC INFLECTION POINTS
E.G “ ELECTRICAL AND ELECTRONICS “ …CGL
• THE PAY OFFS OF A CLEAR VISION STATEMENT
•CRYSTALLISES EXECUTIVES’ OWN VIEWS
•REDUCES RUDDERLESS DECISION MAKING
COMMUNICATING THE STRATEGIC VISION
•WINS SUPPORT FOR INTERNAL CHANGES
•DEPARTMENTS FINE TUNE WITH STRATEGY
•PREPARES ORGANISATION FOR FUTURE
PAYOFFS OF A CLEAR VISION STATEMENT
SETTING OBJECTIVES
• CONVERSION INTO SPECIFIC PERFORMANCE
TARGETS
• QUANTIFIABLE, MEASURABLE WITH DEADLINES
• ‘YOU CAN NOT MANAGE WHAT YOU CANNOT
MEASURE’ ….BILL HEWLETT (HEWLETT PACKARD)
• …..PRACTICAL RATIONAL ACHIEVEMENT
APPROACH……..
• BALANCED SCORECARD
•YARDSTICKS RELATING TO FINANCIAL PERFORMANCE AND STRATEGIC PERFORMANCE
E.G% INCREASE IN SALESROCE OR ROE% INCREASE IN M.S.BRAND NAME APPEALS
SETTING OBJECTIVES
• E.G 3M CORPORATION
•EPS INCREASED BY 10% OR PLUS ANNUAL GROWTH•ON AN AVERAGE, ROE OF 20-25%•ROCE = 27% OR BETTER•MIN 30% SALES FROM NEW PRODUCTS OF 4 YEARS
• IMPROVED S.P. FOSTERS BETTER FIN. PERFORMANCE
• BALANCED SCORECARD APPROACH FOR TRACKING
• NEED FOR BOTH ST & LT OBJECTIVES
SETTING OBJECTIVES
• CONCEPT OF STRATEGIC INTENT MEANS
RELENTLESS PURSUIT
• E.G IN 1980, WAL-MART’S S.I ‘TO OVERTAKE
SEARS’(IN 1991)
• NEED FOR OBJECTIVES AT ALL LEVELS
• TOP DOWN (NOT BOTTOM-UP) OBJECTIVE SETTING
SETTING OBJECTIVES
CRAFTING A STRATEGY
• CEO AS CAPTAIN
• HEADS OF BUSINESS DIVISIONS /FUNCTIONS
• PEOPLE INVOLVEMENT PROCESS..SENSITIVE!• STRATEGY MAKING PYRAMID
•CORPORATE STRATEGY•BUSINESS STRATEGY•FUNCTIONAL-AREA WITHIN EACH BUSINESS
•OPERATING STRATEGIES WITHIN EACH BUSINESS
CRAFTING A STRATEGY
• BUSINESS
• UNITING THE STRATEGY-MAKING EFFORT FULL POWER IF
MANY PIECES OF S ARE UNITED!
• MERGING THE STRATEGIC VISION, OBJECTIVES&
STRATEGY INTO A STRATEGIC PLAN
IMPLEMENTING CHOSEN STRATEGY
• DIRECT CHANGE, MOTIVATE, BUILD & STRENGTHEN
• STAFFING, BUDGETING
• POLICIES, PROCEDURES, RULES
• BEST KNOWN PRACTICES
• INSTALLING INFORMATION&OPERATING SYSTEM
• COMPANY CULTURE & WORK CLIMATE
• EXERTING INTERNAL LEADERSHIP
• CREATING STRONG FITS BETWEEN STRATEGY AND REST
INITIATING CORRECTIVE ADJUSTMENTS
•IF EXTERNAL OR INTERNAL
CONDITIONS WARRANT,
CO’S….REVISITED
INITIATING CORRECTIVE ADJUSTMENTS
CORPORATE GOVERNANCE ROLE OF BOARD OF DIRECTORS …
• BE INQUIRING CRITICS AND OVERSEERS
• EVALUATE THE CALIBER OF THE SENIOR
EXECUTIVES
• INSTITUTE COMPENSATION PLAN FOR THE TOP
EXECUTIVES
………EXERCISES……..
•www.heinz.com
• READ LETTER TO SHAREHOLDER IN 2003
ANNUAL REPORT BY CEO MR. WILLIAM JOHNSON
PERUSAL FOR CRITICAL EXAMINATION
ANALYZING A COMPANY’S EXTERNAL ENVIRONMENT
CHAPTER 3
THREE CRITERA OF A WINNING STRATEGY
1. Appraisal of company
• External and internal situations.
2. Evaluation of most promising strategy
options.
3. Choice of a strategy and the business
models.
RELEVANT COMPONENTS OF EXTERNAL ENVIRONMENT
• S- SOCIAL• P- POLITICAL• E-ECONOMICS• L- LEGAL• T-TECHNOLOGY
• And such others and any relevant factors• Thinking strategically about a company’s
industry and competitive environment.
7 KEY QUESTIONS
1. DOMINANT ECONOMIC FEATURES OF INDUSTRY2. COMPETETIVE FORCES, INDUSTRY, MEMBERS
FACING3. FORCES DRIVING CHANGES IN INDUSTRY4. POSITIONS OF INDUSTRY RIVALS5. LIKELY STRATEGY MOVES OF RIVALS6. KEY FACTORS OF COMPETITIVE SUCCESS7. INDUSTRY OUTLOOK SUFFICIENTLY ATTRACTIVE8. ANSWERS TO ABOVE 7 QS PROVIDE THE
DIAGONOSIS OF INDUSTRY AND COMPETETIVE ENVIRONMENT
Q1. What are the industry’s dominant economic features?
•Market size and growth rate•Scope of competitive rivalry•Number of rivals•Buyer needs and requirements•Production capacity•Pace of technological change•Vertical integration•Product innovation•Degree of product differentiation•Economics of scale•Lerning and experience curve effects
•“ FORCES MODEL OF
COMPETITION”
•By Michael E Porter
Q2. What kind of competitive forces is the industry facing?
1. The rivalry among competing sellers
2. Potential entry of new competitors
3. Competitive pressures of substitute products
4. Pressures from supplier bargaining power
5. Pressures from buyer bargaining power
FORCES MODEL OF COMPETITION
•Hence
•Determine whether the collective
strengths of 5 competitive forces
promote profitability
Q3. What factors are driving industry change and what impacts will they have?
Concept of driving forces
• ‘--- are those that have the biggest influence on what kind of changes will take place in the industry’s structure and competitive environments.---’
• Note: some originate from within the company’s more immediate industry; some originate in company’s microenvironment
HENCE ANALYSIS OF 2 STEPS
•STEP 1. Identifying an industry’s driving
forces
•STEP 2. assessing their impact on industry
STEP 1:Identifying an industry’s driving forces
• 1. Internet technology• 2 globalization• 3 Industry growth rate• 4 User/ usage changes• 5 Product innovation• 6 techno/ mfg innovation• 7 Marketing innovation• 8 entry / exit
• 9 Cost/ efficiency changes• 10 diffusion forces• 11 Differentiated products• 12 not commodity products• 13 Risk / uncertainty reduction• 14 regulatory changes• 15 lifestyles and attitudes• 16 changing society
STEP 1:Identifying an industry’s driving forces Contd..
STEP 2.ASSESSING THE IMPACT OF DRIVING FORCES
CHECK
A) IMPACT ON DEMAND
B) IMPACT ON COMPETITION
C) IMPACT ON PROFITABILITY
Hence, the link between driving forces and
technology
Q 4. What market positions do rivals occupy ?
• WHAT MARKET POSITIONS DO RIVALS OCCUPY
• WHO IS STRONGLY POSITIONED AND WHO IS
NOT?
STRATEGIC GROUP MAPPING(SGM)
• ‘--- IS A TECHNIQUE FOR DEPLOYING THE
DIFFERENT MARKET OR COMPETITIVE
POSITIONS THAT RIVAL FIRMS OCCUPY IN THE
INDUSTRY---’
USNG SGM TO ACCESS MARKET POSITIONS• IDENTIFY VARIABLE• PLOT ON TWO VARIABLE MAP• ASSIGN FIRMS• DRAW CIRCLES PROPORTIONAL TO BUSINESS.• E.g. price/ quality V geographic coverage for
Gucci, channel fends to walmart kmart. • Hence learning from SGM
Q 5- WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE NEXT
• Identifying competitors’ strategy on Resource
Strength and weaknesses
• 1. identifying competitors strategy on
resource, strength and weakness.
• 2 Predicting competitors next moves
Q.6 What are the key factors for success?
• Technology • Manufacturing• Distribution• Marketing• Skills and capability• Other types• Any• All
Q 7. DOES THE OUTLOOK FOR THE INDUSTRY PRESENT AN ATTRACTIVE OPPORTUNITY?
• A general preposition
• If an industry’s over all profit prospects
performance are above average, the industry
environment is basically attractive; if below
average=- un attractive
• NOTE: Important factors could be,
• 1. Industry growth potential
• 2 Future uncertainty
• 3 Power groups of leaders
• 4 Issues of industry
• 5 And such other relevant factors!---
ANALYSING A COMPANIES RESOURCES AND COMPETITIVE POSITION
Chapter 4
ANALYTICAL SPOTLIGHT ON 5 QUESTIONS• HOW WELL IS THE COMPANIES PRESENT
STRATEGY WORKING ?• WHAT ARE THE COMPANIES SWOT ?• ARE THE PRICES AND COSTS COMPETITIVE ?• IS THE COMPANY COMPETITIVELY STRONGER
OR WEAKER ?• WHAT STRATEGIC ISSUES AND PROBLEMS
MERIT ATTENTION ?
Q1.HOW WELL IS THE COMPANIES PRESENT STRATEGY WORKING
•SALES GROWTH
•PROFIT INCREASE
•CREDIT RATING
•IMAGE AND
REPUTATION
•PROACTIVE TACTICS
•NEW CUSTOMERS
•ROI TRENDS
•IMPROVEMENT
MEASURES
•SHAREHOLDERS VIEWS
•SUCH OTHER
Q2 WHAT ARE THE COMPANIES SWOT’S
• STRENGTHS
EXPERTISEPHYSICAL ASSETSHUMAN RESOURCESINTANGIBLE ASSETS(BRAND)ACHIEVEMENTSALLIANCES AND VENTURESCOMPETENCIES
COMPETENCIES
• CORE COMPETENCY – IS SOMETHING AN ORGN IS GOOD AT
DOING. IS A PROFICIENTLY PERFORMED INTERNAL ACTIVITY
THAT IS CENTRAL TO A COMPANIES STRATEGY AND
COMPETITIVENESS, KNOWLEDGE BASE RESIDING IN PEOPLE,
INTELLECTUAL CAPITAL, NOT ASSETS
• DISTINCTIVE COMPETENCIES – IS A COMPETITIVELY VALUABLE
ACTIVITY THAT A COMPANY PERFORMS BETTER THAN RIVALS.
IT IS A COMPETITIVELY SUPERIOR RESOURCE STRENGTH
COMPETITIVE POWER OF RESOURCE STRENGTH
• HARD TO COPY – WAL MARTS DISTR ORGN
• STAYING POWER – KODAK V/S DIGITAL CAMERAS
• REAL SUPERIORITY – COKE V/S PEPSI
• RIVAL TRUMPING – SOUTH WEST FARE, CADILLAC(LINCOLN)
WEAKNESSES
• REPRESENT COMPETITIVE LIABILITIES
INFERIOR/UNPROVEN SKILLS, EXPERTISE
DEFECIENCIES IN ASSETS
MISSING OR INFERIOR CAPABILITIES
NOTE : AN HONEST UNBIASED ASSESMENT
OPPORTUNITIES
•MATCHING WITH FINANCIAL AND RESOURCE
CAPABILITIES
77
THREATS
CERTAIN FACTORS IN EXTERNAL ENVIRONMENT
NOTE : ALSO TO ASSESS INTERNAL SCRUTINY
SWOT ANALYSISSWOT ANALYSIS
STRENGTHS WEAKNESSES
OPPORTUNITIES THREATS
1._________2._________3._________4._________5._________
1._________2._________3._________4._________5._________
1._________2._________3._________4._________5._________
1._________2._________3._________4._________5._________
-Most Basic Model
-Generally ‘The Starting Point’
-4 Basic Strategies:
1. Consolidate Strengths
2. Strengthen Weaknesses
3. Encash Opportunities
4. Protect Threats
Q3 ARE THE COMPANIES PRICES AND COSTS COMPETITIVE
• TWO ANALYTICAL TOOLS ARE
•VALUE CHAIN ANALYSIS
•BENCHMARKS
80
Value Chain and Competitive Advantage
The value chain disaggregates a firm into its strategically relevant activities
IN ORDER TO
Understand the behaviour of costs of existing & potential sources of differentiation
SUPPLIE
RFIRM CHANNE
LBUYER
VALUE CHAINS
Each firms value chain is composed of “Nine “ ‘ generic categories of activities which are linked together in
characteristic ways
81
Primary activities are the activities involved in the “Physical creation “ of the product and its sale and
transfer to the buyers as well as after sales activities
SUPPORT activities support the Primary Activities and each other by providing purchase inputs,
technology,human resources and various firmwide functions
82
-“It is the combination of technologically distinct,production,distribution,selling and/or other economic processes within the confines of a single firm.” Porter
As such it represents a decision by the firm to utilize internal or administrative transactions rather thanmarket transactions to accomplish the economic
purposes.
Eg. Own sales force or independent selling organization. i.e. Functions performed by a consortium of independent economic entities,each contracting with a single
co-ordinator.Eg. Book Publishing and recording industries.
Many publishers contract for editorial services,layout,graphic,printing,distribution and selling,RETAINING for the firm little more than decisions about which books
to publish,marketing and finance.
Some recording companies similarly contract with independent artists,producers,recording studios,disc pressing facilities and distribution and
marketing organizations to create, manufacture and sell each record.Many V.I decisions are in terms of MAKE x BUY.
VERTICAL INTEGRATION
VALUE CHAIN ANALYSIS
• CONSISTS OF THE LINKED SET OF VALUE CREATING ACTIVITIES THE
COMPANY PERFORMS INTERNALLY
•PRIMARY ACTIVITIES – ARE FOREMOST IN CREATING VALUES FOR
CUSTOMERS
•SUPPORT ACTIVITIES – THAT FACILITATE AND ENHANCE THE
PERFORMANCE OF PRIMARY ACTIVITIES
•NOTE:VALUE CHAIN INCLUDES PROFIT MARGIN BECAUSE A MARKUP
OVER THE COST OF PERFORMING THE FIRMS VALUE CREATING
ACTIVITIES IS CUSTOMARILY PART OF PRICE(OR TOTAL COST) BORNE
BY USERS
VALUE CHAIN ANALYSIS
NOTES :FUNDAMENTAL OBJECTIVE OF EVERY ENTERPEISE IS TO CREATE AND DELIVER VALUE TO BUYERS WHOSE MARGIN OVER COST YIELDS ATTRACTIVE PROFITS
EXPOSURE TO MAJOR ELEMENTS OF COST STRUCTURE. EACH ACTIVITY IN THE VALUE CHAIN GIVES RISE TO COSTS AND TIES UP ASSETS, ASSIGNING THE COMPANY’S OPERATING COSTS AND ASSETS TO EACH INDIVIDUAL ACTIVITY IN THE CHAIN PROVIDES
VALUE CHAIN ANALYSIS
•COST ESTIMATES
•CAPITAL REQUIREMENT
• ASCERTAINS RELATIVE COST POSITION vis-a-vis RIVALS
Fig. 4.3: A Representative Company Value Chain
WHY VALUE CHAINS OF RIVAL COMPANY’S OFTEN COLLIDE
• EVOLUTION OF BUSINESS• INTERNAL OPERATIONS• STRATEGY• ECONOMICS OF THE ACTIVITIES• VARYING DEGRESS OF INTEGRATION• Eg: ALUMINIUM CAN PRODUCERS PLANT NEXT TO
BEER BREWERIES AND USE OF OVERHEAD CONVEYERS
• A COMPANY’S COST COMPETITIVENESS DEPENDS NOT ONLY ON THE COSTS OF INTERNALLY PERFORMED ACTIVITIES ie ITS OWN VALUE CHAIN BUT ALSO ON THE COSTS IN VALUE CHAIN OF ITS SUPPLIES AND FORWARD CHANNEL ALLIES
Fig. 4.4: Representative Value Chain for an Entire Industry
DEVELOPING THE DATA TO MEASURE A COMPANY’S COST COMPETITIVENESS
• BREAK DOWN DEPARTMENT
• COST ACCOUNTING DATA INFORMATION
• THE COST OF PERFORMING THE SPECIFIC
ACTIVITIES
BENCHMARKING THE COSTS OF KEY VALUE CHAIN ACTIVITIES
• COSTS OF PERFORMING COMPANY’S ACTIVITY
• BENCHMARKING AGAINST COMPETITIVE COST AND/OR ANY
INDUSTRY’S BETTER PERFORMING ACTIVITY
NOTE : IN 1979 JAPANS COPIER IN US WAS $9600 EACH (DUMPING
SUSPECTED) LESS THAN XEROX’S PRODUCTION COSTS
FUJI XEROX STUDY TOUR REVEALED INEFFICIENCIES IN THE
MANUFACTURING PROCESS
STRATEGIC OPTIONS FOR REMEDYING A COST DISADVANTAGE
• THREE KEY AREAS
•COMPANY’S OWN ACTIVITY SEGMENT
•SUPPLIERS PART OF THE INDUSTRY’ VALUE CHAIN
•FORWARD CHAIN PORTION OF THE INDUSTYR CHAIN
TRANSLATING PROFICIENT PERFORMANCE OF VALUE CHAIN ACTIVITIES INTO COMPETITIVE ADVANTAGE
• DEVELOP COMPETENCIES AND CAPABILITIES THAT
PLEASE BUYERS
• THAT RIVALS DON’T HAVE OR CANT MATCH
•EG MERCK & GLAXO IN EXTENSIVE R&D TO ACHIEVE
FIRST DELIVERY OF NEW DRUGS CAREFULLY
CONSTRUCTED APPROACH TO PATENTING
•FED EX IN FLEET OPERATIONS
Q.4 IS THE COMPANY COMPETITIVELY STRONGER OR WEAKER THAN KEY RIVALS
• HOW DOES IT RANK vis-a-vis COMPETITORS ON
EACH IMPORTANT FACTORS
• DOES IT HAVE A NET COMPETITIVE ADVANTAGE
OR DISADVANTAGE vis-à-vis MAJOR COMPETITORS
•NOTE : LIST OF KSF AND MOST TELLING MEASURES OF
COMPETITIVE STRENGTH OR WEAKNESSES ON 1 TO 10
SCALE BOTH WEIGHTED AND UN WEIGHTED
Q.5 WHAT STRATEGIC ISSUES AND PROBLEMS MERIT FRONT BURNER MANAGERIAL ATTENTION
• DRAW ON THE RESULTS OF BOTH INDUSTRY AND
COMPETITIVE ANALYSIS AND THE EVALUATION OF
COMPANY’S OWN COMPETITIVENESS
•PINPOINT EXACT PROBLEM !!!
•EXERCISE – GROWING POPULARITY OF
DOWNLOADING MUSIC FROM THE INTERNET – DOES
IT GIVE RISE TO A NEW MUSIC INDUSTRY VALUE
CHAIN?
The STRUCTURAL ANALYSIS OF INDUSTRIES AND GENERIC STRATEGIES
CHAPTER 5
96
Competitive Strategies
essence is
‘ Relating a Company to its
Environment’ By Michael Porter
Competition in an Industry
is rooted in its underlying
economic structure
The state of competition is
an industry depends
of five basic competitive forces
The Collective Strengths of these
forces determines the ultimate profit potential *
*measured in terms of long run return on
invested capital in an industry.
Threat of substitute products or services
Threat of new entrants
POTENTIAL
ENTRANTS
SUBSTITUTES
INDUSTRY COMPETITORS
RIVALRY AMONG EXISTING FIRMS
BUYERSSUPPLIERS
Bargaining power of buyers
Bargaining power of suppliers
F1 Force One: Threat of Entry
• Depends on ‘barriers to entry’ that are present coupled
with reactions from existing competitors that new
entrant can expect
Six Major Sources
• Six major sources of Barriers to Entry are:
1. Economies of Scale2. Product Differentiation3. Capital Requirements4. Switching Costs5. Access to Distribution Channels
(Note B) Cost of Disadvantages Independent of Scale6. Govt. Policy
F 1 (1) Economies of Scale
•Decline in unit costs of a product (or operation or function that goes into producing a product)
•The principle of Economies of Scale applied to every function of business including manufacturing, purchasing, R&D, marketing, service network, sales force utilisation, distribution.
•Eg. Xerox and General Electric realised scale of economies in production, research, marketing and service. Color tube production.
JOINT COSTS
• A firm producing product A (or an operation or function
that is part of producing A) must inherently have the
capacity to produce product B.
• E.g. Air passenger service and Air Cargo – business units
shares intangibles assets such as brand-name or know-
how.
• Vertical Integration
F1 (2) Product Differentiation
• Established Firms have brand identification and customer loyalties
•Reasons could be
•Past advertising
•Customer service
•Product differences
•Being first in industry
Strong and most important in baby-care products, OTC drugs,
cosmetics, investment banking, public accounting etc.
Differentiation Variables
106
Product Services Personnel Channel Image
Form Ordering Case Competence Coverage Symbols
Features Delivery Courtesy Expertise Media
Performance Installation Credibility Performance Atmosphere
Conformance Customer training
Reliability Events
Durability Customer consulting
Responsiveness
Reliability Maintenance and repair
Communication
Repairability Miscellaneous
Style
Design
• Sensitive if unrecoverable up front advertising – R & D
• Plus areas such as
•Customer Credit•Inventories•Start-up losses
•Case – Xerox will rent (not sell) copiersIncrease in working capital !
- Capital Intensive areas like computer, mineral extraction
F1 (3) Capital Requirements
F1 (4) Switching Costs
• One time costs facing the buyer of switching from one suppliers product to another’s
• Switching Costs include
•Employee retaining cost•New ancillary (helping/service) equipment•Cost and time in testing a new source•Product re-design•Need for technical help as a result of reliance on seller engineering aid
•Psychic cost of severing a relationshipCase: Intravenous (IV) solutions and kits for use
in hospitals hardware for hanging IV bottles
F1 (5) Access to Distribution Channels
• New entrant to persuade the channels to accept its
products through
- Price breaks
- Co-operative advertising allowances
- And likes that reduce profits
If , more limited wholesale or retail channel
Tougher entry for new entrants
Case – Timex outlet in watch industry.
Note (B) Cost Disadvantages Independent of Scale
• Established firms may have cost advantages
• - Not replicable by potential entrants
• - No matter of their size and economies of scale
On account of factors such as :-
(i) Proprietary product technologyPatents, secrecy
(ii) Favorable access to raw materials(iii) Favorable locations(iv) Govt. subsidiaries(v) Learning or experience curve- Price drops with
production increases due to experience especially in aircraft mfg, ship building
(vi) Net Experience is kept proprietary
F1 (6) Govt. Policy
• Licensing requirements
• Limits on access to Raw Materials
• Regulated Industries
EXPECTED RETALIATION
• History of vigorous retaliation
• Established firms with substantial resource
• Established firms with great commitment to the industry
• Slow industry growth
ENTRY DETTERRING PRICE
• The prevailing structure of prices which just balances the
potential rewards from entry, with the expected costs of
overcoming structural entry barriers and risking
retaliation
If current price > e.d.p.---- high profit --- entry YES
PROPERTIES OF ENTRY BARRIERS
• -E.B. do change as conditions change
- Case:
• Firms strategic decision can have a major impact.
• Firms possess resources or skills which allow them to
overcome E.B. better than others !
EXPERIENCE & SCALE AS ENTRY BARRIERS• Both after coincide but they have very different
properties as E.B.
•Note: Products/ Process innovations, Trade-off with
other barriers, Industry Growth & (2 or more) players
in Experience Curve, Mkt. Development details.
F2 Force Two: Intensity of Rivalry Among Existing Competitors
• Rivalry because•One or more competitors feels pressure•See/s opportunity to improve position
• Some tactics are•Price competition•Advertising battles•Product introduction•Increased customer service•Warranties
Interactive Structural Factors – Intense Rivalry
1. Numerous or Equally Balanced Competitors2. Slow Industry Growth
So Market Share Game!3. High Fixed or Storage Lost4. Lack or Differentiation or Switching Cost
Product is almost commodity,5. Capacity Augmented in Large Increments6. Diverse Competitors
Firms diverse to parent Co’s – Complexity7. High Strategic Stakes8. High Exit Barriers
- Specialized assets – fixed costs or exit- Strategic inter-relationship – emotional barriers- government & social restrictions
SHIFTING RIVALRY
• Industry moves from growth to maturity
•Decline profits & a shake-out
• An acquisition introduces a very different personality to an
industry
eg. P&G acquires Charmin Paper Company.
• Technological innovation can boost Fixed Cost
• Strategic shift (say) engg. Assistance to customers in re-
designing services etc.
EXIT BARRIERS AND ENTRY BARRIERS
EXIT B. EXIT B.
Low High Low High
E
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T
R
Y
B.
E
N
T
R
Y
B.
L
o
w
H
i
g
h
L
o
w
H
i
g
h
Low
Stable
Returns
Low
Risky
Returns
High
Stable
Returns
High
Risky
Returns
EXIT BARRIERS AND ENTRY BARRIERS
Entry Exit Profit/ReturnsBest H L …… √
H H …… √ + Risk
L L …… unexciting but low Returns
Worst L H …… unfortunate position
F3 FORCE 3: PRESSURE FROM SUBSTITUTE PRODUCTS
1. Subject to trends improving their price- performance
trade-off with the industry’s product
2. Are produced by industries earning high profits
Sugar producer – high fructose corn syrup
Natural fiber – synthetic yarn
F4 FORCE 4: BARGAINING POWERS OF BUYERS
1. Concentrated or purchases large volumes relative to seller sales
2. Product purchased from industry represents a significant fraction of buyer’s costs
3. Product purchased are standard or undifferentiated
4. Faces few switching costs5. Earns low profits6. Buyers pose credible threat of Backward
Integration.7. Industry's products is unimportant to the
quality of buyer’s products or services8. Buyer has full information.
ALTERING BUYING POWER
• Co’s strategic decision – dept. stores & clothing stores to
LARGE CHAINS also choice of buyer selection
• Replacement market for most products is less price
sensitive than OEM market.
F5 FORCE 5: BARGAINING POWER OF SUPPLIERS
1. Dominated by a few companies and is more
concentrated than industry it sells to.
2. Not obliged to contend with other substitute product for
sales to the industry
3. Industry is not an important customer of the supplier
group
4. Suppliers product is an important input to the buyer’s
business
contd
5. Supplier groups products are differentiated or it has built
up switching costs.
6. Supplier group poses a credible threat of Forward
Integration
7. Labour also to be treated as supplier based an degree of
organization, scarce varieties & skill and possible growth !
AND GOVERNMENT!!
GENERIC COMPETITIVE STRATEGY
Three Generic Strategy(Internally consistent successful generic strategies)
1. Overall cost leadership: Texas Instruments2. Differentiation : Intel Micro processors
3. Focus : ATR Walk Shoes in extreme sports segment
Note: Three Generic Strategies can be used singly or in combination.
STRATEGIC ADVANTAGE
DifferentiationOverall
Cost Leadership
Focus
St rateg I c
Target`
PartSegment
only
Industry Wide
Uniqueness perceived by customer Low cost positioning
OVERALL COST LEADERSHIP
Due ‘Experience Curve Concept’
Yields above average returns,
Gives a defence against rivalry
Defends the firms against powerful buyers
Defends against powerful suppliers
Favourable positioning vis-à-vis substitutes.
Requires….
High Relative Market Share
Favourable access to raw material
Heavy capital Investment
Aggressive pricing
Examples:
Briggs & Straton has 50% of market share in small
H.P gasoline.
Lincoln Electric in arc welding equipment.
General Motors
Texas Instruments
Black & Decker
Du Pont
Reliance
Japan (as a country – in Automotive Sector)
Profit = Price – Cost
Cost = Price – Profit
DIFFERENTITATION
Creating something that is perceived industry wise as being unique.
Many forms of approaches.
Design forms or brand image (Mercedes Benz)
Technology (Macintosh in stereo components)
Features
Customer service (Crown cork and seal in metal cans, Jet Airways :
Paneer story)
Dealer Network (ITC in foods (Biscuits etc, Caterpillar Tractors v/s
Mahindra Tractors
Other Dimensions
Can earn above – average returns with defensible position for coping with 5
forces, resulting customer loyalty & need for a competitor to overcome
uniqueness (Entry Barrier)
On a particular buyer group
Segment of the product line
Geographic market
The firm either achieves:
Differentiation from better ways in meeting need of particular target
Low costs in serving the target
Or both of the above
FOCUS
Examples
Illinois Tool works for fasteners.
Sundaram fasteners.
Howard Paper serves a narrow range of industrial grade
papers.
Martin Brower is the 3rd largest food distributor in USA
has reduced its
customer list to just 8 leading fast food chains.
Generic Strategy
Commonly Required skills and resources
Common Organisation Requirement
Overall cost leader
Substantial Capital investment and access to capital
Process Engineering
Labour Supervision
Product design:
Ease in Manufacturing
Low cost distribution system.
Tight cost control. Frequent control reports
Structured organisation and responsibilities
Incentives based on meeting strict quantitative targets
Differentiation Strong Marketing
Product Engineering
Creative flair
Capability in basic research
Corporate reputation for quality or
techno leadership.
Strong Coordination among functions
in R&D, Product development and
marketing
Subjective measurement and incentives
instead of quantitative measures.
Amenities to attract highly skilled labour,
scientist or creative people.
Focus Combination of the above policies directed
at the particular strategic target
Combination of the above policies directed
at the particular strategic target
Other requirements of Generic Strategies
Firms failing to develop its strategy in at least are one of
the three is ‘stuck in the middle’
Examples:
Clark equipment in lift truck industry
Chrysler,
Sipani Motors- Dolphin,
Fiat- Ambassador
Stuck in the Middle
Such firms must make a fundamental strategic design.Steps for C.L or at least cost Parity
May make aggressive investments to buy market share
Orients towards particular target
Achieve some uniqueness
R
O
I
Market Share
Failing to attain or sustain the strategy
For the value of the strategic advantage provided by the strategy to erode with industry evaluation
Risk of the Generic Strategies
Risk of overall cost leadership
Technologically change that nullifies past investments or learning
Low cost learning by industry new comers or followers, through imitations or
through their ability to invest in state of the art facilities.
Inability to see required product or marketing change because of attention
placed on cost.
Inflation in costs that narrow the firms ability to maintain enough of a price
differential to offset competitors brand image or other ways of differentiation.
Risk of differentiation
Cost differential becomes too great for differentiation to hold brand equity. (Kawasaki motorcycle)
Buyers’ need for the differentiating factors falls (Nirma v/s Surf)
Imitation narrows perceived differentiations (Reynolds, Rotomac v/s Apsara Pencils)
Risk of Focus
Cost differential offsets
Difference in desired products or services between strategic target and the market
Competitors find sub markets within the strategic target and out focus the focuser.
Industry evolution:Market life cycle
Starting point is “Framework and structural analysis”
Hence do ask this question
“Are there any changes occurring in the industry which will effect
each element of industry?”
Grandfather is Product Life cycle
“Frame work for forecasting evolution”
More fruitful to look underneath the process to see what really drives
the industry
Evolutionary Processes
There are some predictable and interacting dynamic processes
that occur in every industry
• Long term changes in growth
Changes in buyer segments served
• Buyer’s learning
Reduction of uncertainty
• Diffusion of proprietary knowledge
Accumulation of experience
• Expansion/contraction in scale
Changes in input and currency costs
Evolutionary Processes (Contd)
• Product Innovation
Marketing innovation, process innovation
• Structural changes in adjacent industries
Government Policy changes
• Entries and exits
Porters 5 competitive strategies
CHAPTER 6
The Five Generic Competitive Strategies
• Low-cost provides strategy
• Broad Differentiation strategy
• Best Cost Provider Strategy
• Focused (or market niche) strategy based on Lower cost
• Focused (or market niche) strategy based on
Differentiation
Strategy 1: Low Cost Provider Strategy
• Meaningfully lower cost than rivals (not lowest)
•HOW?
•Option 1: Under price to attract price sensitive
customers
•Option 2: Maintain all present and increase profits
Two major avenues for Achieving
A1: Increase efficiency in Value Chains, Cost Drivers
A2: Revamp variable cost by elimination or bypass
A1: Controlling Cost Drivers
1. Economies or Diseconomies of scale
2. Learning Curve Effects
3. Costs of Key Resource Inputs
E.g Union vs Non Union Workers
Locational variables, etc
4. Links with other activities in value chain
5. Sharing Opportunities with others
E.g Same Sales Force
A1: Controlling Cost Drivers
6. Vertical Integration vs Outsourcing
7. First mover Advantage and Disadvantage
E.g Yahoo, now Google
8. % of Capacity Utilization
E.g Higher Depreciation + Fixed Cost
1. Spread over larger volumes
9. Strategic choices and Operating Decisions
E.g adding or cutting services
Adding or cutting quality features
A2: Revamping the Value Chain
1. Enhance Internet technology application
2. Using direct-to-end user marketing approach
3. Simplify product design
4. Stripping away extras
5. Less capital intensive flexible process
6. By-pass high cost RM or component parts
7. Relocating facilities
8. Drop ‘something for everything’ approach
EXAMPLES
• Southwest Airlines
•‘fast airline at the gates
•25 mins vs 45 mins
• Dell Computers
PC as per customer, made and shipped thus eliminates
trade margins
• Wal-mart with private satellite communication system
When it works?
1. Vigorous Price Competition
2. Identical Usage
3. Identical Users and suppliers ready availability
4. Few Ways of Product Differentiation
5. Low costs in switching suppliers
6. Large buyers with bargaining powers
7. Newcomers use introductory low prices
Pitfalls
• Getting carried away with pricing
• Not emphasizing on avenues of cost advantage that can
be kept Proprietary
•E.g Sustainability
• Too fixed on Cost Reduction
Strategy2: Differentiation Strategies
• Buyers’ needs & preferences are too diverse
• Allows companies
•To command a premium price
•To increase unit sale
•To gain brand loyalty
Types of Differentiation Themes
• A unique taste Listerene
• Multiple features Windows
• Superior service FedEx
• Engineering Design Mercedes, BMW
• Prestige & Distinct Rolex
• Product Reliability Johnson Baby Products
• Range of Service Schweb in Stock Broker
• Complete Service Campbell’s soups
Where to Create
1. Supply Chain activities α end products
e.g Starbucks coffee for coffee bean specification
2. Product R&D activities
3. Production R&D technology
4. Mfg activities to reduce defects
5. Distribution for faster delivery
6. Marketing, Sales and Customer Service resulting in
superior assistance
Approaches to achieving
• Incorporate product attributes and user features that lower buyer’s
overall cost
• Incorporate features that enhance buyer satisfaction in non-
economic or intangible ways!
Goodyear Safety on roads
BMW, Rolex Status, Image
• Deliver value to customers that rivals don’t have or cannot afford
matching
Japan can bring new car models faster!
Importance of Perceived Value
• Subjective
• First time purchase
• Repurchase infrequent
• Unsophisticated buyer
• Sir’ eg of Sloan’s Balm & Linimend
When it works?
• Buyers having strong specific preference
• Needs and uses are diverse
• Few rivals following similar approaches
• Technology change is fast-paced and competition on
new features
Pitfalls
• Over differentiation
• Charging TOO high premium
• Does not lower buyer’s cost or enhance buyer’s well
being
• Timid way, not striving to open up meaningful gaps in
quality or service or performances
Strategy No 3 Best Cost Provider Strategies
• Aims at more value for money
• Middle ground position, hybrid balance of customization and
differentiation
•E.g Toyota Lexus (less than Merc and BMW)
• Risk is ‘get squeezed’ b/w low cost & Diff Strategy
• Target market is value-conscious buyer
•Powerful in markets where buyer diversity makes product
diff norm and where buyers are price sensitive & value-
sensitive
(Strategy no 4&5)
• Focused strategies
•Concentrated attention or narrowed
• Target segment or niche can be defined by
geographic uniqueness, special product attributes
•ebay in online auctions
•Porsche Sports car
•Cannondalc Mountain Bike
•Google Search engine
•Local owner managed retail boutique
Strategy No 4
• Target market niche customers at low cost
• Replacement ink and toner cartridges of printers
• E.g Motel 6 to price conscious travelers who want a clean
no frills place to spend night
• E.g Producers of Private label goods
Focused Low cost strategy
Strategy No. 5
• Offering niche product they perceive as well suited to their
unique tastes and preferences
• Trade Joe’s 150 Stores = East and West coast chain in fashion
food retailers offers raspberry salsa, salmon burgers jasmine
fried rice, standard goods - Whimsical Treasure Hunt!
• Aims at securing a competitive advantage by offering niche
members a product they perceive as well suited to their own
unique tastes & preferences
• Examples : Rolex, Rolls – Royce, Gucci – employ Strategy 5
targeted at upscale buyers wanting products & services with
world class attributes
Focused Differentiation strategy
When 4 & 5 applicable?
• Target market niche us big enough
• Industry leaders don’t mind presence V. their success
• Difficult for multi-segment competitor’s strategy
• Industry has many niches and few rivals attempt
• Focuser can challenge based on goodwill built in niche
Risks of 4& 5
• Competition matching focuser’s capabilities
• Potential for preference & needs of niche members to
shift over time toward product attributes desired by
majority
• Segment becoming so attractive, it is soon inundated
with competitors, intensifying rivalry and splintering
profits!
165
Types of Strategies
Strategy Definition Example
1. Market Penetration Seeking increased market share for present products or services in present markets through greater marketing efforts.
Ameritrade ,the online broker ,tripled its annual advertising expenditure to $200 million to convince people they can make their own investment decisions.
2. Market Development
Introducing present products or services into new geographic area.
Britain’s leading supplier of buses, Henly’s PLC, acquires Blue Bird Corp., North America’s leading bus maker.
3. Product Development
Seeking increased sales by improving present products or services of developing new ones.
Apple developed the G$ chip that runs at 500 megahertz.
Strategy Definition Example
4. Forward Integration Gaining ownership or increased control over distributers or retailers.
General Motors is acquiring 10% of its dealers.
5. Backward Integration
Seeking ownership or increased control of the firm’s suppliers.
Motel-8 acquired a furniture manufactures.
6. Horizontal Integration
Seeking ownership or increased control over competitors.
Hilton recently acquired Promus.
Strategy Definition Example
7. Concentric diversification
Adding new but related products or services.
National Westminister Bank PLC in Britain buys the leading insurance company, Legal & General group PLC.
8. Conglomerate diversification
Adding new, unrelated products or services.
H&R Block, the top tax preparation agency, said it will buy discount stock brokerage Old Financial for $850 millions in cash.
9. Horizontal diversification
Adding new, unrelated products or services for existing customers.
The New York Yankees baseball team is merging with the New Jersey Neys basketball team.
Strategy Definition Example
10. Joint venture Two or more sponsoring firms forming a separate organization for cooperative purpose.
Lucent Technologies & Philips Electronics NV formed Philips Consumer Communications to make & sell telphones.
11. Retrenchment Regrouping through cost & asset reduction to reverse declining sales & the profit.
Singer, the sewing machine maker, declared bankruptcy.
12. Divestiture Selling a division or a part of organization.
Harcourt General, the large US publisher, selling its Neiman Marcus division.
13. Liquidation Selling all of company’s assets, in parts, for their tangible worth.
Ribol sold all its assets and ceases business.
14. Michael Porte Generic Strategies
•Customer Leadership
•Differentiation
•Focus
15. The Value chain
Strategy Definition Example
16. Mergers Two organizations(of about equal size) unite to form one enterprise.
Phone Giants US West and Quest in 1999.
17. Acquisition Large organization purchases( acquires) a smaller firm or vice versa.
Dow chemicals plans to buy Union Carbide, so as to be No.2 after DuPont pushing BASF to No.3
18. Takeover or Hostile takeover
When an acquisition or merger is not desired by both parties it is takeover.
Olive H took over Telecom Italia.Volkwagen AG has purchased Rolls-Royce, Bently, Lamborghini, Cosworth & Buggati.
19. Leveraged Buyouts (LBOs)
• A leveraged buyout occurs when a corporation’s shareholders
are bought by company’s management and other private
investors using borrowed funds(hence leverage).
• It avoids hostile takeover.
• Senior management decisions may solicit that particular
divisions do not fit into an overall corporate strategy or must
be sold to raise cash ,or reciept of an attractive offering price.
20. Joint Venture
• Two or more companies form a temporary partnership or consortium
for the purpose of capitalizing on some opportunity.
• Eg: Nestle & Pillisbury a JV named Ice Cream Partners USA in
California(N).
21. Co-operative Arrangements
Includes R&D partnerships,
Cross distribution agreements,
Cross licensing agreements,
& joint-bidding consortia.
BEYOND COMPETITIVE STRATEGIES
CHAPTER 7
176
To complement choice of basic competitive
strategy
• Strategic alliances and collaborative
partnerships
• Mergers and acquisitions
• Industry value chain integration
• Out source or in-house
• Offensive and defensive move
• Internet as distribution channel
• Any others
STRATEGIC ALLIANCES AND COLLABORATIVE PARTNERSHIPS
• Global race….to be recognized as global market leader
• Race to seize opportunities on advancing technology frontiers
• Strategic alliances are collaborative partnerships where two or more companies join forces to achieve mutually beneficial strategic outcomes
i.e Toyota with suppliersMicrosoft with independent software
developersOracle has 1500 alliancesIBM and Microsoft has 200 partnerships with
e- business enterprisesSamsung with Sony, yahoo, Hp, Intel Dell
etc
STRATEGIC ALLIANCES AND COLLABORATIVE PARTNERSHIPS
• Note: 35% revenue in 2003 Vs 15% in 1995 by alliance
• To get into critical country matches quality
• Accessing valuable skills and competencies
• Master new technologies & expertise
e.g Volvo, Renault Peugeot alliance in making engines own plant
economically
J & J with Merck for Pepcid AC, Stomach distress remedy developed
by Merek, marketed by J & J
United, American, Continental, Delta & Northern Airlines
MERGER AND ACQUISITION STRATEGIES• Suited for situations in which alliances and partnerships do not go far
enough in providing a company with access to the needed resources and
capabilities.
• Ownership more permanent then partnerships.
• Merger is a pooling of equals, with the newly created company often
taking on a new name
• Acquisition is a combination in which one company, the acquirers
purchases and absorbs the operation of the acquires.
• Relates more to ownership, managerial control and financial
arrangements
OBJECTIVES
• To gain more market share and create more ethical operation: i.e Daimler Benz + Chrysler = Daimler Chrysler
• To expend geographic coverage • In new product categories or international markets. i.e: Pepsi
Co acquired Quaher Oats, Nestle, Unilevers, Proctor & Gamble
• Quick access to technology + R& D efforts: i.e. Lucent technologies in T/com networking
• To try to invent a new industry, thus new opportunities:i.e Time warner, Paramount Pictures Entertainment
• Exercise:Clear channel……Global market Leader..Case studywww.clearchannel.com, Sep 2003Business week, oct 19,1999, p -56
INDUSTRY VALUE CHAIN INTEGRATION
• Vertical integration scope is within basic industry
Source of supply backward to towards end users format =>
Full or partial integrationStrengthens firms competitive positionBut, disadvantages i.e new technology
adoption slow, less reliance of own resources in backward or forward, capacity matching problems, radically different kinds of requirement
OUTSOURCE OR INHOUSE
Two main driving themes are:
• Outsiders can often perform certain activities
better or cheaper
• Outsourcing sing allows a firm to focus its
entire energies on its core business
ADVANTAGES
• Cheap• Better• Non crucial to core• Risk reductions• Streamlining help• Allows company to concentrate on core
competencies• Enhance ability to innovate with “best in world”• Flexibility• Assembly of diverse kind• control
INTRODUCTION
• INCREMENTAL IMPROVEMENT• SUCCESSFUL BUSINESS STRATEGIES RESULT
NOT FROM RIGOROUS ANALYSIS BUT FROM A PARTICULAR STATE OF MIND
• GREAT STRATEGIC CALL FOR TECHNICAL MASTERY IN THE WORKING BUT ORIGINATE IN INSIGHTS THAT ARE BEYOND THE REACH OF CONSCIOUS ANALYSIS (OLDER IS CEO SO MIDDLE AGE DRIVER)
MIND OF THE STRATEGIST
by kenichi ohmae
INTRODUCTION
• GROUP OF YOUNG “SAMURAIS” WHO WOULD PLAY A DUAL ROLE
A. AS REAL STRATEGISTS GIVING FREE REIN TO IMAGINATION, ENTREPRENEURIAL FLAIR
A. AS STAFF ANALYSISTS TESTING OUT DIGESTING & ASSIGNING PRIORITIES TO THE IDEAS & PROVIDING STAFF ASSISTANCE TO LINE MANAGERS IN IMPLEMENTING THE APPROVED STRATEGIES.
186
A1 ANALYZING POINT :THE STARTING
Habit of Analysis
Intellectual Elasticity or Flexibility to come up with realistic responses to the changing conditions
Ultimate non-linear thinking tool is BRAIN THE FIRST STAGE
• To pinpoint the critical issues in the situation
• The questions are not framed to point forward a solution,
rather they are directed towards finding remedies to
symptoms
• Concrete Phenomena - > Grouping - > Abstraction - >
Determination of the Approach(Very concrete and Specific)
187
Fail safe methodology
Draw issue diagram (like decision tree)
Value Analysis and Value Engineering
The Profit Diagram
• Can profit be gained externally?
• Can profits be increased by raising efficiency internally?
• True strategist depends on neither on one nor the other
• He has a more reliable recipe for success
• “Combination of analytical method and mental elasticity is
Strategic Thinking” Kenichi Ohmae
A2 FOUR ROUTES TO STRATEGIC ADVANTAGE
• BUSINESS STRATEGY IS ALL ABOUT
‘COMPETITIVE ADVANTAGE’
1. To identify the key factors for success (KFC) in industry
(or business) concern and then to inject a concentration
of resources into a particular area where the company
sees an opportunity to gain the most significant strategic
advantage over it’s competitors. “KFC” Strategy!
2. To exploit any difference in the competitive conditions
between the company and its rivals.
a. Make use of technology, sales, network profitability and so on
of those of its products which are not competing directly with
the target competitor OR
b. Make use of any other differences in the composition of
assets between the enterprise and its competitors
“Relative Superiority” Strategy!
3. To upset the key factors for success on which the PRINCIPAL
competitor has built an advantage.
Starting point is to challenge the accepted assumptions governing
the way of doing business rules of the game , upset status !
‘Aggressive Initiatives’ Strategy !
4. Deployment of innovations
Say new market, new product thus exploitation of the market by
vigorous measures in particular areas that are untouched by
competitors.
‘Strategic Degrees of freedom’ Strategy !
A3 Focusing on key factors ‘KFS Strategy !’
Two approaches A and B
A. To dissect the market
As IMAGINATIVELY as possible to identify
its key segments
B. To discover what distinguishes
Winner companies from looser and then to
analyze the difference between them
3 A. Dissecting the market
1. eg. Japanese ship building company product market matrix
P1 Larger Tender P M1 European 1st Class
P2 Mid Tender a European 2nd ClassP3 Small Tender y Green 1st ClassP4 High Trade Cargo o Green Small
P5 Mid Trade Cargo f Hong KongP6 Low Trade Cargo f Petroleum
Companies‘ & Developing Countries‘ work on Communist Block
Pn Liquid Gases priorityEg. Forkift truck manufacturer “Customers in retailing and constructing industries”
B. Highlighting differences between W&L Distribution network (Service and Lift)
Identifying the KFS is not enough!
Toyota Root out waste! …….VAM
Hitachi Management improvement…MI
A 4 Building on relative superiority
Eg. Japan’s amateur colour film market
1. Fugi.. leader gaining MS
2. Sakura leader in 1950 but losing
Blind test ‘product quality’ no problem!
But word association in Japanese
Sakura cherry blossom
Suggesting a soft, blurry pinkish image !
Fuji Brilliant blue skies and white snows of Japanese sacred
mountain
Sakura analyzed the market from
1. Structured
2. Economic
& 3. Customer point of view
Discovered Growing cost (OS) – Consciousness among
film customers
Opportunity to introduce 24 – exposure film at the
same price as 20 - exposure film
Issue is financial strength
Sakura analyzed the market from
1. Structured
2. Economic
& 3. Customer point of view
Discovered Growing cost (OS) – Consciousness among film customers
Opportunity to introduce 24 – exposure film at the same price as 20 -
exposure film
Issue is financial strength
A5. PURSUING AGGRESSIVE INITIATIVES
• Strategist’s weapons are
•Strategic thinking
•Consistency
•coherence
WHEN KFS SATURATION Is REACHEDWHEN KFS SATURATION Is REACHED
• Thoroughgoing challenge to the accepted common sense
of the industry
•Why FTL tube be long and narrow?
•Why not built in flash in camera
•Why outes publication can not be eaten
•Why stockpile
The question Why
• Demand reasons for that and persist in a shing
Why ? 4- 5 times in succession.
A 6. EXPLOITING STRATEGIES
• DEGREES OF FREEDOM = SDF
• SDF DESIGNATES THE AXES ALONG WHICH SUCH A
STRATEGY REALISTICALLY WORKED OUT.
• E.G. MORE SAFETY IN CAR
•IMPROVEMENT IN VISIBILITY
•INSTRUMENTATION, VENTILATION SYSTEM
•FATIGUE FREE SEATS, BREAKING SYSTEM
•SUSPENSION SYSTEM, ENERGY ABSORBING
•BODY STRUCTURE
Crucial Elements in SDF
• SDF CONCEPT IS THAT OF THE OBJECTIVE FUNCTION, THE VOLUME OR VARIABLE WE WISH TO MAXIMIZE.
• E.G. COFFEE BUSINESS (TASTE OF COFFEE)
•KIND OF BEAN•QUALITY OF BEAN•TYPE OF ROAST•FINENESS OF GRIND •ELAPSED TIME BETWEEN GRINDING & BREWING •WATER HARDNESS•MODE OF CONTACT BETWEEN WATER AND GROUND COFFEE
•TEMPERATURE AT WHICH THE BREWED COFFEE IS MAINTAINED
•ELAPSED TIME BETWEEN BREWING & DRINKING
Chapter 8
Diversification : Strategies for Managing a Group of Businesses
Picking new industries to enter and deciding on means of
entry.
Initiating actions to boost the COMBINED PERFORMANCE of
the business the firm has entered.
Pursuing opportunities to leverage cross business value
chain relationships and strategic fits into competitive
advantage.
Establishing investment priorities and steering corporate
resources into the most attractive business unit.
Corporate Strategy Perspective: Four Facets
[Concentrate on a single business and success! no need to
diversify! e.g. Mc Donald’s, South-West, Wal-Mart, Fed-Ex etc…]
Big risk of single business is that firm’s eggs in ONE Industry
Basket!
If market erosion by new technologies OR o/w new products,
fast shifting buyer preferences etc => Diversify.
e.g. Digital cameras and film and film processing industry.CD
and DVD technology for cassettes, tapes and floppy disks.
i.e. opportunities to grow revenues and earnings in the
company’s mainstay business taper out / become narrow…
IT IS THE TIME TO DIVERSIFY!
When to Diversify
[Besides aforesaid] 4 other instances viz.
1. That industry’s technologies and products complement its
present business
2. Can leverage existing competencies & capabilities where
same resource strengths are valuable assets
3. Closely related businesses with new avenues for reducing
costs
4. Has powerful & well-known brand name that can be
transferred to other businesses
Factors signaling time to diversify
Building Shareholder Value: Ultimate Justification
1.Industry Attractiveness Test
2.The Cost-of-Entry Test
3.The Better-off Test
Contd..
1. Acquisition
2. Internal Start-up
3. Joint Ventures / Strategic Partnerships
Strategies for Entering New Businesses
1. Acquisition of an Existing Business
• Whether friendly or hostile
2. Internal Start-up
• Building a new business subsidiary from scratch
• Parent company has skills
• Ample time to launch
• Costs lower than acquiring
• Less expected head-on collisions with leaders
• Production will not hamper new industry’s demand - supply
Strategies for Entering New Businesses
3. Joint Ventures and Strategic Partnerships
• Joint Ventures: Forming a new corporate entity owned by
partners
• Strategic Partnership: When one of the partner so chooses
• Useful in 3 types of situations:
i. Complex, risky for single organization to capitalize
ii. New industry require broader range of competencies
iii. ONLY WAY to gain desirable entry in new industry
Contd..
Choosing Diversification Path: Related Vs Unrelated
Related:
• Value chains possess competitively
• Valuable cross business value chain strategic fits
Unrelated:
• Dissimilar
• No valuable relationships
Strategic fits happen
1. Along the Value chain/ Supply chain activities.
2. R&D and technology.
3. Manufacturing
4. Distribution
5. Sales & marketing
6. Managerial & Administrative support
7. Economies of scope & Competitive Advantage
8. Any other suitable
Related Businesses
Focuses on building and managing a portfolio of business subsidiaries
capable of delivering desired performances!
(other abovestated issues are ignored)
And evaluation on set criteria
Profitability, R.O.I.
Requirement of capital expansion, Working capital etc.
Growth potential (SIGNIFICANT?)
Big business
Union or Government regulation difficulty
Unrelated Businesses
Vulnerability to recession, inflation etc. and quick
opportunities when
1. Company’s assets are undervalued
2. Financially distressed companies
3. Bright growth prospect but short of capital.
Contd..
1. Theme parks
2. Disney cruise line
3. Resort properties
4. Movie/ Video productions
5. TV broadcasting – ABC, Disney channel, Toon etc.
6. Radio broadcasting
7. Musical recordings
8. Sales & Animation arts
9. Baseball franchise
10. Books & magazines publishing
11. Interactive software & Internet sites
12. The Disney store retail shops
Best example of Unrelated: WALT DISNEY
1. Evaluate Industry attractiveness
2. Evaluate Business: Unit competitive strength
3. Check competitive advantage potential of cross
business strategic fits.
4. Check for resource fits.
5. Rank business units – Performance + Priority
6. Crafting new strategic moves to increase
performance.
Combination of Related and Unrelated Diversification Strategies
VERTICAL HORIZONTAL GLOBAL
ACQUISITIONS
Times inc. acquires Warner
Communication (Entertainment business)
Philip Morris buys 7-UP (Cigarette + Soft drink)
BASF buys Inmont in U.S. (Chemical Company)
STRATEGIC ALLIANCES
Cetus (Bi-tech) with larger Companies giving Capital &
Markets
Dow Chemicals & Corning Glass - A JV bigger than
either
Fuji photos and Xerox in Photocopiers
INTERNAL DEVELOPMENT
Human → Full line health care services across
Insurance, Hospitals & Follow-up treatment
3M gets more than 25% revenue from new
products of last 5 years.
An-Busch opens new markets by taking
Budweiser
MILLER & DESS
MEANS
FORMS
• Addition of business related to the firm in terms of technology,
market or products
• High degree of compatibility with the current business
Eg. HEAD SKI – Summer sporting goods & clothing to offset
seasonality of snow business.
Concentric Diversification
• Firm plans to acquire a business because it represents
the most promising investment opportunity available.
• Sole concern is Profit Pattern.
• Little concern for product/ market strategy with
existing.
Conglomerate Diversification
219
ANNEXURE
LIFE CYCLE STRATEGIES
Stages of a life cycle
Time
INDUSTRY
SCALE
ANSOFF’s GROWTH MATRIXANSOFF’s GROWTH MATRIX
Three growth options are available :
I. Within Current Businesses Intensive!
II. Related to Current Businesses Integrative!
III. Unrelated to current businesses Diversification!
ANSOFF’s GROWTH MATRIXANSOFF’s GROWTH MATRIX
Predictions of Product life cycle
Functions Introduction Growth Maturity Decline
Buyers andBuyerBehavior
High income PurchaserBuyer InertiaBuyers must beConvinced
Widening Buyer groupConsumer willAccept unevenquality
Mass MarketSaturationRepeat BuyingChoosing among Brands is rule
Sophisticated Buyers of the product
Products and product change
Poor qualityDesign and development keyDifferent product variationsFrequent design changes
Good qualityTechnical and performance differentiationRelaibility key
Superior qualityLess productDifferentiationLess productChanges
Little productDifferentiationSpotty product quality
Predictions of Product life cycleFunctions
Introduction Growth Maturity Decline
MarketingVery High (advertising/sales)High marketing costsCreaming priceStrategy
High advertising but lower percent of salesAdvertising and distribution key
SegmentationEfforts to extend life cycleBroaden linePackaging importantLower advertisingcompetition
Low(advertising/sales)Lower marketingcosts
Manufacturing anddistribution
High production costsOvercapacitySpecialized channelsShort production runsHigh skilled labor
Shift towards mass productionUnder capacityMass channelsScramble fordistribution
Some overcapacityMass channelsLong production runs with stable techniquesLower labor skills
Substantial OvercapacitySpecialty channelsMass production
Predictions of Product life cycle
Functions
Introduction Growth Maturity Decline
Foreign trade
Some exports Significant exportsFew imports
Falling exportsSignificant imports
No exportsSignificant imports
Overallstrategy
Best period to increase market shareR & D , engineering are key functions
Practical to change price or quality imageMarketing the keyfunction
Bad time to increase market ShareHaving competitive costs Bad time to change quality imageMarketing Effectiveness Keys
Cost control keys
Predictions of Product life cycle
FunctionsIntroduction
Growth Maturity Decline
CompetitionFew companies
Entry of Many competitorsLots of mergersAnd causalities
Price competitionShake-outIncrease in private brands
ExitsFewer competitor
RiskHigh risks
Risks are covered by growth
Cyclicality sets in
Predictions of Product life cycle
Functions
Introduction Growth Maturity Decline
Margins and profits
High prices and marginsLow profitsPrice elasticity to individual seller not as great as in maturity
Highest profitsFairly high pricesRecession resistantHigh P/E’sGood acquisitionclimate
Falling pricesLower profitsLower dealer MarginsIncreased stability of market shares and price structurePoor acquisition climate
Low prices Low MarginsPrice might rise in late decline
Key relationships in Industry evolution
a)Industry concentration and high mobility barrier
b)Converse of a) means None with low
c)Exit barriers deter consolidation
d)Long run profit potential and future structure
Strategies For Sustaining Rapid Company Growth
Theory of Horizons of Growth
• Companies that are focussed in growing their revenues and earnings at a rapid or
above- average pace year after year generally have to craft a portfolio of strategic
initiatives covering three horizons.
Horizon I:
• Strategic initiatives to fortify and extend position in existing business
• Initiatives typically include
1) Adding new items to present product line
2) Expand into new geographical areas
3) Launching offensives to take rival’s market share
• Objective is capitalize fully on WHATEVER Growth Potential exists in Present Business
Arenas
Strategies For Sustaining Rapid Company Growth...
Horizon II:
• Strategic initiatives to leverage existing resources & capabilities by entering new
Business with promising Growth “Potential.
• H2 takes Back Seat as long as there is plenty of untapped growth in Present Business.
• BUT move to FRONT as the onset of Market maturity dims the present Growth
Prospective.
Horizon III:
• Strategic initiatives to plant the seeds for ventures in businesses that don’t yet exist.
• Entail pumping funds into large range R&D, setting up internal venture capital fund or
acquiring no. of small start-up companies.
• e.g. INTEL has invested in over 100 Projects.
The Three Strategy Horizons for Sustaining Rapid Growth
“ Short-jump” initiatives to
fortify and extend current businessesImmediate gains in revenues and
profits
“Medium-jump” initiatives to
leverage existing resources and capabilities to
pursue growth in new
businessesModerate
revenue and profit gains now, but
foundation laid for sizable gains over
next 2-5 years
“Long-jump” initiatives to sow
the seeds for growth in
businessesof the future
Minimal revenue gains now and
likely losses, but potential for significant
contributions to revenues and
profits in 5-10 years
Time
Portfolio ofStrategy
Initiatives
Strategy Horizon
1
Strategy Horizon 2
Strategy
Horizon 3
Space Matrix Strategic Position & Action Evaluation
Steps to Develop SPACE Matrix
• Select a set of variable to define FS, CA, ES, IS.
• Assign numerical value range 1 (worst), 6 (best) FS/IS & - 6 (worst), -1 (best)and
prepare scale
• Compute average scores by summing values given to variables
• Plot average scores for FS, IS, ES, CA
• Add two scores on X-axis & plot resultant point on X. Similarly on Y. Plot the
intersection on the new XY point.
• Draw a Directional Vector from the origin of the SPACE matrix through the new
intersection point.
This Vector reveals the type of strategies recommended for the organization:
Aggressive, Competitive, Defensive, Conservative
SOURCE: ROW + Mason + Dickel on Strategic Management & Business Policy
Example Factors that Make Up the SPACE Matrix Axes
235
INTERNAL STRATEGIC POSITION EXTERNAL STRATEGIC POSITION
Financial Strength (FS) Environmental Stability (ES)
Return on investmentLeverageLiquidityWorking capitalCash FlowEase of exit from marketRisk involved in business
Technological changesRate of inflationDemand variabilityPrice range of competing productsBarriers to entry into marketCompetitive pressurePrice elasticity of demand
Competitive Advantage (CA) Industry Strength (IS)
Market shareProduct qualityProduct life cycleCustomer LoyaltyCompetition’s capacity utilizationTechnological know-howControl over suppliers and distributors
Growth potentialProfit potentialFinancial stabilityTechnological know-howResource utilizationCapital intensityEase of entry into marketsProductivity, capacity utilization
Aggressive Profiles
A financially strong firm that has achieved major competitive advantages in a growing and stable industry
A financially strong firm that has achieved major competitive advantages in a growing and stable industry
A firm whose financial strength is a dominating factor in the industryA firm whose financial strength is a dominating factor in the industry
Conservative Profiles
A firm that has achieved financial strength in a stable industry that is not growing; the firm has no major competitive advantages
A firm that has achieved financial strength in a stable industry that is not growing; the firm has no major competitive advantages
A firm that suffers from major competitive disadvantages in an industry that is technologically stable but declining in sales
A firm that suffers from major competitive disadvantages in an industry that is technologically stable but declining in sales
Competitive Profiles
A firm with major competitive advantages in a high-growth industryA firm with major competitive advantages in a high-growth industry
An organisation that is competing fairly well in an unstable industryAn organisation that is competing fairly well in an unstable industry
Defensive Profiles
(-1, -5)
A firm that has a very weak competitive position in a negative growth, stable industryA firm that has a very weak competitive position in a negative growth, stable industry
A financially troubled firm in a very unstable industryA financially troubled firm in a very unstable industry
• Four quadrant framework indicates whether aggressive, conservative,
defensive or competitive strategies are most appropriate for a given
organization.
• The axis of the SPACE matrix represent two internal dimensions
• Financial Strength (FS)
• Competitive Advantage (CA)
AND
Two external dimensions are
• Environment Stability (ES)
• Industry Growth (IG)
• These four factors are the most important determinants of an organizations
overall strategic positions.
• Factors earlier included in EFE & IFE matrices should be considered in developing
in SPACE Matrix.
• Like TOWS, SPACE should be tailored to the particular organization being studied.
TOWS MATRIX TOWS MATRIX
-Tows Matrix is a framework for a systematic analysis that
facilitates matching the external threats and
opportunities with internal weaknesses and threats of
the organization
-Tows starts with threats because in many situations a
company undertakes strategic planning as a result of
perceived crisis, problem or threat.
Maxi - Maxi
External Factors
Internal Factors
STREN
GTHS
WEA
KNES
SE
S
OPP
ORTU
NIT
I
ES
SO S WO S
ST S WT S
THREA
TS
Mini - Maxi
Maxi - Mini Mini - Mini
TOWS MATRIX TOWS MATRIX
4 Alternative Strategies
1. WT Strategy . . .minimize both W & T. eg. Form a joint venture, retrench, even liquidate!
2. WO Strategy . . .minimize W, maximize O.
Eg.: development strategy to overcome W in order to take advantage of O.
3. ST Strategy . . .maximize S, minimize T.
Eg.: technological, financial, managerial or marketing strengths to cope with threats.
4. SO Strategy . . .Potentially the most successful strategy, utilizing strengths to encash opportunities.
TOWS MATRIX TOWS MATRIX Time Dimension and TOWS Matrix
Because of dynamics in the business environment, strategy designer must prepare several TOWS matrices at different points of time with T as variable i.e. T2
n
S W
O So Wo
T ST WT
PAST
S W
O So Wo
T ST WT
PRESENT
S W
O So Wo
T ST WT
PRESENT + T1
S W
O So Wo
T ST WT
PRESENT+T2, etc.
TIME
Internal Strategic Positions External Strategic Positions
Financial Strength Environment Stability
ROI Technological Change
Leverage Rate of Inflation
Liquidity Demand Variability
Working Capital Price Range (Competitors)
Cash Flows Entry Barriers to Market
Ease of Exit from Market Competitive Pressure
Risk Involved in Business Price Elasticity of Demand
Competitive Advantage Industry Strength
Market Share Growth Potential
Product Quality Profit Potential
Product Life Cycle Financial Stability
Customer Loyalty Technology Know-How
Competition’s Capacity Utilization Resource Utilization
Technological Know-How Capital Intensity
Control Over Suppliers & Distribution
Ease of Entry into Market
EFE Matrix – External Factor Evaluation Matrix
Key External Factors Weight
Ratings
Weighted Score
OPPORTUNITIES
1. Internet Advertising 0.05 1 0.05
2. Social Pressure to Quit Smoking 0.10 3 0.30
3. Smokeless Tobacco Untapped Global Market
0.15 1 0.15
4.
5.
THREATS
1. Legislation Against 0.10 2 0.20
2. Limit on Production 0.05 3 0.15
3. XYZ Government 0.20 1 0.20
4.
5.
TOTAL 1.00 2.10
IFE Matrix – Internal Factor Evaluation Matrix
Key External Factors Weight
Ratings
Weighted Score
OPPORTUNITIES
1.
2.
3.
4.
5.
THREATS
1.
2.
3.
4.
5.
TOTAL 1.00 2.75
Key External Factors Weight
Rating
Weighted Score
Internal Strength1.Global markets are practically untapped by smokeless tobacco market2.Increased demand caused by public banning of smoke3.Astronomical Internet advertising growth4.Pinkerton is leader in discount tobacco market5.More social pressure to quit smoking, thus leading users to switch to alternatives
.15
.05
.05
.15
.10
1
3
14
3
.15
.15
.05
.60
.30
Internal Weakness1.Most properties are located in Las Vegas2.Little diversification3.Family reputation, not high rollers4.Laughlin properties5.Recent loss of joint venturesTOTAL
.10
.05
.05
.10
.201.00
23221
.20
.15
.10
.20
.202.10
An Example External Factor Evaluation Matrix for UST, Inc.
Key Internal Factors Weight Rating
Weighted Score
Internal Strength1.Largest casino company in the United States2.Room occupancy rates over 95% in Las Vegas3.Increasing free cash flows4.Owns one mile on Las Vegas Strip5.Strong management team6.Buffets at most facilities7.Minimal comps provided8.Long-range planning9.Reputation as family-friendly10.Financial ratios
.05
.10
.05
.15
.05
.05
.05
.05
.05
.05
4434333433
.20
.40
.15
.60
.15
.15
.15
.20
.15
.15
Internal Weakness1.Most properties are located in Las Vegas2.Little diversification3.Family reputation, not high rollers4.Laughlin properties5.Recent loss of joint venturesTOTAL
.05
.05
.05
.01
.011.00
12211
.05
.10
.10
.10
.102.75
A Sample Internal Factor Evaluation Matrix Mandalay Bay
The Internal-External (IE) Matrix
249
1.0 to 1.99IXVIIIVIILow
2.0 to 2.99
THE
EFE
TOTAL
WEIGHTED
SCORE
VIVIVMedium
3.0 to 3.99 IIIIIIHigh
1.0 to 1.992.0 to 2.993.0 to 4.0WeakAverageStrong
The IFE Total Weighted Score
Grow and build
Hold and maintain Harvest or Divest
1.0
2.0
3.0
4.03.0 2.0 1.0
CHAPTER 9
EXECUTION OF STRATEGY
Strategy execution process
1. Building a capable organization
2. Marshaling Resources behind the drive
3. Facilitating Policies and Procedures
4. Adopting best practices & striving for continuous improvement
5. Installing information and operating systems
6. Trying rewards and incentives
7. Shaping the work environment and corporate culture
8. Exerting the Internal leadership needed to drive
1. Building a Capable Organization Staffing the organization
◦ Putting together a strong management team
◦ Recruiting and retaining capable employees
Building core competencies and competitive capabilities
◦ Develop abilities to perform
◦ Tried and true competence or capabilities
◦ Distinctive competence
Structuring Organization and work effort
◦ Deciding on activities to be performed internally or outsourcing
◦ Making strategy critical activities as the main building blocks of organization structure
◦ Determining degree of authority and independence
2. Marshalling Resources behind the drive• Current vs expected- strategy driven budget eg. Pulling
out engineers from Govn. Projects and deploy new
commercial venture discount
3. Instituting policies and procedures
• Give top-down guidance
• Consistency in geographically scattered units
• Promote creation of work climate
4. Adopting best practices and striving for continuous improvement
•Benchmarking the company’s peformance
of particular activities and processes against
‘best in industry’ and ‘best in the world’
performers.
•Beat the best theme
•Total quality management programme.
ContdContd……
Six sigma through
◦ DMAIC(define, measure, analyze, improve, control)
◦ DMADV(define, measure, analyze, design, verify)
◦ Underlying principles-
All work is process
All processes have variability
All processes create data that explains
variability
Contd..Contd..
• Institutionalizing improvement management
process ,individual goal setting, group goals, and SGIA
with Japanese Management technique.
5. Installing information and operating systems
• Eg. Fedex => 60000 vehicles, 5.2 mn. Packages/day =>
so internal communication system + leading Edge flight
O.S.(LEFOS) allows a single controller to direct 200 of
650+ aircrafts simultaneously
6. Rewards and incentives6. Rewards and incentives•Assortment of motivational techniques and
rewards to enlist organizational commitment•Financial incentives head the list
•Base pay increment, performance bonus, profit sharing stock rewards, contribution to retirement benefit plans
•Attractive perks and fringe benefits•Reliance on promotion •Value ideas and suggestions of the employees
•Climate of genuine sincerity and mutual respect
•Feeling of worthwhile contribution•Flexibility of operations
7. Shaping the work environment & corporate 7. Shaping the work environment & corporate cultureculture
• Corporate culture refers to the character of a company’s
internal work environment & personality as shaped by its
core values, beliefs, business principles, traditions,
ingrained behavior & style of operations
• Role of stories, perpetuations, culture- subculture,
acquisitions, culture conflict, strong (vs weak culture)
• Create fit between strategy and culture
• Grounding culture in core values and ethics
8. Leading the strategy execution process • Stay on top
• Exert constructive pressure
• Keep organization focused on operating excellence
• Lead development of stronger competencies
• Ethical integrity
• Corrective actions
