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STRATEGIC MANAGEMENT
2
MEANING & DEFINITION Strategic Management can be defined as “the
art and science of formulating, implementing
and evaluating cross-functional decisions that
enable an organization to achieve its objective.”
Definition:
“The on-going process of formulating,
implementing and controlling broad plans guide
the organization in achieving the strategic
goods given its internal and external
environment”.
COMPARISON
STRATEGIC TACTICAL OPERATIONAL
Long range Intermediate Short range
3 or more yrs 2-3 yrs One yr
Top mgt Middle Lower
Broad objectives Integration of departments Day to day working
Focus on planning &
forecasting
On co-ordination On control
Levels of Strategy
Corporate –Level
Business-Level
Functional -Level
BUSINESS POLICY
Business policy provides a basic
framework defining fundamental issues of a
company, its purpose, mission and broad
business objectives and a set of guideline
governing the company's conduct of
business within its total perspective.
Overall Guide
Focus on strategic allocation of scarce resources
Types of Policies
MAJOR POLICIES:
Lines of business
Code of ethics
SECONDARY POLICIES:
Selection of geographic area
Identification of major customers
Major products
Types of Policies
FUNCTIONAL POLICIES: Production
Marketing
Finance
Personnel
Research
RULES:
Salary & wage Adm.
Discipline& discharge
Welfare Adm
Safety & health
Strategy Vs Policy
STRATEGY POLICY
Strategic decisions Guidelines
Putting a policy into
effect
General course of action
Deals with crucial
decisions, requires top
mgt involvement.
Once formulated can be
delegated to lower levels
STRATEGIC
MANAGEMENT PROCESS
STRATEGIC MANAGEMENT PROCESS
SMP
1. Vision formulation which leads to the
statement of the Mission.
2. The mission is then converted into
performance Objectives
3. To achieve objectives you develop
Strategies
4. Strategy Implementation
5. Evaluation of performance
Purpose of SMP
CORE COMPETENCE
SYNERGY
VALUE Creation
CORE COMPETENCE
An organization’s core competence
is something it does exceptionally
well in comparison to its
competitors. It reflects a distinct
competitive advantage like superior
research, development etc..
SYNERGY
Two or more sub systems working
together to produce more than the
total of what might they produce
working alone.
Ex:1+1=3
VALUE CREATION
Exploiting core competencies and
achieving synergy help organizations
create value for customers. Value is
the sum total of benefits received and
cost paid by the customer.
Steps in SMP
Vision, Mission, Objectives
External Analysis
Internal analysis
STRATEGIC INTENTVision,Mission,Objectives
Strategic intent is about clarity, focus
and inspiration.
VISION
MISSION
OBJECTIVES
GOALS
PLANS
VISION
Corporate vision is a short and inspiringstatement of what the organization intendsto become and to achieve at some point inthe future, often stated in competitive terms.
Vision refers to the category of intentionsthat are broad, all-inclusive and forward-thinking. It is the image that a businessmust have of its goals before it sets out toreach them.
It describes aspirations for the future,without specifying the means that will beused to achieve those desired ends .
Mission
Mission Statement describes what business you’rein and who your customer is. As such, it capturesthe very essence of your enterprise - itsrelationship with its customer.
Developing mission statement is the step whichmoves your strategic planning process from thepresent to the future.
It depicts the mission statement connects “today”with the “future.” Your mission statement must“work” not only today but for the intended life ofyour strategic plan of which your mission statementis a part.
If you’re developing a five year strategic plan, forexample, you develop a mission statement whichyou believe will “work” for the next five years.
Values
For any statement, whether mission or
vision, to be embraced and acted upon, it
must reflect the values of your organization.
Values describe what your management
team really cares about. How would your
managers respond to a trade-off between
product quality and profit? That’s really a
question of value.
Corporate Goals & Objectives
Role of Objectives:
1. Legitimacy
2. Direction
3. Coordination
4. Benchmarks for success
5. Motivation
Characteristics of obj;
Obj. form a HIRERACY
Network
Multiplicity of Obj
Long and short-range obj
ENVIRONMENTAL ANALYSIS
Environment may be defined as the set of external factors such as economic, socio cultural, Govt. & legal, demographic, which are uncontrollable in nature & affect the business decisions of a firm or company.
1) Micro Environment
2) Macro Environment
Micro Environment-
1) Supplier
2) Customers-industrial, retailers, wholesalers, Govt., foreigners
3) Market intermediates- middlemen, physical distribution firms, marketing service agencies, and financial intermediaries
4. Competitors-
Desire competitions – limited disposable income many unsatisfied desires T.V./washing machine/ investment
Generic competition-among alternatives which satisfied particular category of desire- Investment in U.T.I./P.O./Bank/Any other.
Product form competition- Washing machine, semi/ automotive
Brand competition- Videocon/godrej
5. Public –
media
citizen action public
local public
Macro Environment -uncontrollable
1. Economic Environment
Eco. Conditions- business cycle, growth of economy, size of domestic Market & its dynamic effect
Eco. Policies- budgets, industrial regulations, eco planning, import & export regulations, business laws, , industrial policy, control on price & wages, trade & transport policy, size of national income, demand & supply of various goods
Economic System—of a country
free enterprise i.e. capitalist
socialist
communist
mixed
2. Political & Govt. Environment. -
Legislature- decide particularly
course of action
Executive -implementation
Judiciary -to see above both
working public interest.
3. Socio Cultural Environment-people attitude to work & health, role of family, marriage, religion & education, ethical issues, social responsibilities of business
4. Natural Environment- geographical & ecological factors- natural resources endowments, weather & climatic conditions, topographical factors, locational aspects, port facilities
5. Demographic Environment. - Size growth age composition of population, family size, economic stratification of population, educational level, caste religion etc.
6. Technological Environment-marketing, innovation, R & D
7. International Environment-liberation force of view global perspectives
Environmental Scanning:
It helps every mgt in attaining maximum
profits and growth and the same time helps
in minimization of future threats.
Environment analysis has 3 basic objectives
Under taking of current & potential changes
Should provide inputs for strategic decision
making
Rich source of idea & understanding of the
context, bring fresh views
Environmental Analysis-
Scanning
general supervision of all env. Factors & their interaction in order
1. to identify early signals of change,
2. Detect env. Changes underway
Monitoring
tracking the env. Trends sequences of events or stream of activities. Study of Indicators, assemble data to discern emerging patterns. Three outcomes emerges in monitoring
1. A specific description of env. trends
2. Identification of trends
3. Identification of areas of further scans
Forecasting - scanning & monitoring provide a picture of what is happening strategic decision Making requires future orientation. Forecasting is developing future projections of changes
Assessment - outputs of above 3 steps are assessed to determine implementation. Assessment involves identifying & evaluate how & why current & projected env. Changes affect strategic Mgt. Of the organization
Techniques of Environment Analysis
SWOT Analysis, strengths, weakness, opportunities, & threats.
Forecasting methods
Time services analysis & projection-moving averages, exponential smoothing book Jenkins, trend projection.
Casual Methods- regression model, econometric model, anticipation surveys, input output model, diffusion index, leading indicators, life cycle analysis.
Qualitative Method-Delphi method, market research, panel consensus, visionary forecast, historical analogy.
Scenario technique- preparation of background, selection of critical indicators, establishing past behavior of indicators, verification of potential future events, forecasting the indicators, writing of scenario.
Preparation of ETOP-environmental threat & opportunity profile is a summary of environmental factors. It is a structured way. Assessing Importance of environmental factors, assessing impact factor combining importance & impact factor.
Environmental Scanning &
Monitoring
•Environmental scanning is a concept from
business management by which
businesses gather information from the
environment, to better achieve a
sustainable competitive advantage.
•To sustain competitive advantage the
company must also respond to the
information gathered from environmental
scanning by altering its strategies and
plans when the need arises.
Environmental Scanning &
Monitoring- Techniques
SWOT
Industry Analysis
Techniques
Competitor
Analysis
PEST QUEST
SWOT(Strength-Weakness-Opportunity-Threat)
Identification of threats andOpportunities in the environment(External) and strengths andWeaknesses of the firm (Internal) is thecornerstone of business policyformulation; these factors whichdetermine the course of action toensure the survival and growth of thefirm.
What is “PEST”?
PEST Analysis – The Meaning
A PEST analysis is an analysis of the external macro-
environment that affects all firms.
P.E.S.T. is an acronym for the Political, Economic,
Social, and Technological factors of the external
macro-environment.
Such external factors usually are beyond the firm's
control and sometimes present themselves as threats.
However, changes in the external environment also
create new opportunities.
A. Industry Life Cycle Analysis
B. Study of the structure and
characteristics of an Industry
C. Profit Potential of Industry (Porter
Model)
Industry Analysis: Three sections
A. Industry Life Cycle Analysis
Four Stages:
Pioneering Stage
Rapid Growth Stage
Maturity and Stabilization Stage
Decline Stage
B. Study of the structure and
characteristics of an Industry
1. Structure of the Industry and nature of Competition
2. Nature and Prospectus of the demand
3. Cost, Efficiency and Profitability
4. Technology and Research
Michael Porter has argued that the profitpotential of an industry depends on thecombined strength of the:
1. Threat of new entrant
2. Rivalry among existing firms
3. Pressure from substitute products
4. Bargaining power of buyers
5. Bargaining power of sellers
3. Profit Potential of Industry (Porter
Model)
INTERNAL ANALYSIS
SWOT analysis
Value chain Analysis
Financial Analysis
Key factor rating
Functional area profile
Strategic advantage profile
Internal Analysis
Resource-Based View
Firms have heterogeneous resources and capabilities.
By exploiting core competencies, firms can develop value-creating strategies superior to their competitors.
Four criteria must be met for a sustained competitive advantage.
Valuable
Costly to imitate
Rare
Non-substitutable
Internal Analysis
Resources• Tangible• Intangible• Brand Equity
Capabilities
Core
Competencies
Competitive
Advantage
Above-Average
Returns
Components of the Resource- Based View
Internal Analysis
Resources and Capabilities:
Resources
• Represent what the firm has to work with.
• Resources must be combined to establish a capability.
• Types:
• Tangible
• Intangible
• Brand Equity
Internal AnalysisTangible Resources – Assets that can be seen, touched or quantified.
- Financial resources (borrowing capacity)- Physical Resources (facilities, locations)- Organizational structure (reporting structures)- Technological (patents)
Intangible Resources
- Human resources (experience, training)- Resources for innovation (technical employees, facilities)- Reputation
Brand Equity
- Brand name- maintaining brand equity (Mercedes example – value/performance and Japanese automakers)
Portfolio Analysis
And
BCG Matrix
The Growth Share Matrix
It evaluates the strength of a firm from the portfolio
of businesses or products the firm has in different
stages of PLC, which are required for future growth.
It analyses the impact of investing resources in
different SBUs on the corporate’s future earnings
and cash flow.
SBUs are evaluated from two ways
1. Industry attractiveness (market growth)
And
2. Competitive strength (relative market share)
The Growth Share Matrix
A Matrix is created considering the market
growth and relative market share of all the
businesses in their respective industries
and businesses are placed in that matrix for
analysis and evaluation.
The Growth Share Matrix
The market growth rate on the vertical axis is
the proxy measure for the industry
Attractiveness.
The relative market share is proxy for its
competitive strength in the industry.
BCG Growth-Share Matrix
In BCG approach, the company classifies all its SBUs into 4 types as
“star”,
“cash cow”,
“question mark”
and
“dog”
according to their market growth and relative market share.
The BCG Matrix
Source: Perspectives, No. 66, “The Product Portfolio,” Adapted by permission from The Boston Consulting Group, Inc., 1970.
Relative market share
Cash cows Dogs
High
Low
Questionmarks
Stars
Mark
et
gro
wth
rate
Cash cows Dogs
High
High Low
Questionmarks
Stars
High
Low
Low
$
?Stars
Cash Cows Dogs
Problem Child
Relative market share
Mark
et
gro
wth
rate
M
ark
et
gro
wth
rate
Relative market share
Mark
et
gro
wth
rate
BCG Matrix
Stars
Cash Cows Dogs
Problem Child
Relative market share
Mark
et
gro
wth
rate
M
ark
et
gro
wth
rate
Relative market share
Mark
et
gro
wth
rate
BCG Matrix
Revenue ++++
Expenses _ _ _
Net +
Revenue +
Expenses _ _ _ _
Net _ _ _
Revenue + + + + +
Expenses _
Net + + + +
Revenue + +
Expenses _ _ _ _
Net _ _ _
BCG Market Share/Market Growth Matrix
BCG Matrix
Dogs are businesses that have a very small
share of a market that is not expected to
grow.
Cash cows are businesses that have a
large share of a market that is not expected
to grow substantially.
Question marks are businesses that have
only a small share of a quickly growing
market.
Stars are businesses that have the largest
share of a rapidly growing market.
Stars
are high-growth, high-share businesses or
products. They often need heavy
investment to finance their rapid growth.
Therefore, they may not be producing a
positive cash flow. The business strategy
will generally be for growth fueled by
externally acquired capital. Eventually,
their growth will slow, and they will turn into
cash cows.
Cash cows
are low-growth, high-share businesses or
products. These established and successful
SBUs need less investment to keep their
market share. They produce a lot of cash to
be used for other business units of the
company. They are either milked for
investment in stars or question marks or
harvested if there is little optimism for a
stable future.
Question marks
sometimes called problem children, are low-
share business units in high-growth markets.
They need a lot of cash to keep and increase
their share; they can not generate enough
cash themselves. Management must decide
which question mark it should build into stars
and which should phase out.
Dogs
are low-growth, low-share businesses and products. They often have poor profitability. Therefore, the business strategy for a dog is most often to divest, but occasionally to hold for possible strategic repositioning as a question mark or cash cow.
Portfolio Strategies
FourPortfolio
Strategies
BUILDDoes the SBU have the potential to be a star?
HOLD
Can you maintain and preserve market share?
DIVEST
Is it appropriate to dump SBU’s
with low-growth potential?
.HARVEST
Increase the short-term return without
impacting long-run prospects.
Limitations of the BCG Matrix
1. Market Growth rate is an inadequate descriptor of overall industry attractiveness.
2. Relative market share is inadequate as a descriptor of overall competitive strength.
3. The analysis is highly sensitive to how growth and share are measured.
4. It provide little guidance on how best to implement the investment strategies.
5. The model implicitly assumes that business units are independent or one another except for the flow of cash.
How to Identify SBUs?
It is the basic competitive unit of a company.
It has a specific and identifiable group of
customers.
It has specific and identifiable competitors.
It can be measured as an independent entity in
terms of profit and loss.
Therefore, it may require a separate marketing
strategy.
GE / McKinsey Matrix
In consulting engagements with General
Electric in the 1970's, McKinsey &
Company developed a nine-cell portfolio
matrix as a tool for screening GE's large
portfolio of strategic business units (SBU).
This business screen became known as the
GE/McKinsey Matrix and is shown below:
The GE matrix has nine cells vs. four cells
in the BCG matrix.
The GE / McKinsey matrix is similar to the BCG growth-share matrix in that it maps strategic business units on a grid of the industry and the SBU's position in the industry. The GE matrix however, attempts to improve upon the BCG matrix in the following two ways:
The GE matrix generalizes the axes as "Industry Attractiveness" and "Business Unit Strength" whereas the BCG matrix uses the market growth rate as a proxy for industry attractiveness and relative market share as a proxy for the strength of the business unit.
The vertical axis of the GE / McKinsey matrix is industry attractiveness, which is determined by factors such as the following:
Market growth rate
Market size
Demand variability
Industry profitability
Industry rivalry
Global opportunities
Macroenvironmental factors (PEST)
Industry Attractiveness
Each factor is assigned a weighting
that is appropriate for the industry.
The industry attractiveness then is
calculated as follows:
The horizontal axis of the GE / McKinsey matrix is the strength of the business unit. Some factors that can be used to determine business unit strength include:
Market share
Growth in market share
Brand equity
Distribution channel access
Production capacity
Profit margins relative to competitors
The business unit strength index can be calculated by multiplying the estimated value of each factor by the factor's weighting, as done for industry attractiveness.
Business Unit Strength
Industry attractiveness and business unit strength are calculated by first identifying criteria for each, determining the value of each parameter in the criteria, and multiplying that value by a weighting factor. The result is a quantitative measure of industry attractiveness and the business unit's relative performance in that industry
Industry attractiveness =
factor value1 x factor weighting1
+ factor value2 x factor weighting2+…
GE MATRIX contd..
Each business unit can be portrayed as a circle plotted on the matrix, with the information conveyed as follows:
Market size is represented by the size of the circle.
Market share is shown by using the circle as a pie chart.
The expected future position of the circle is portrayed by means of an arrow.
Plotting the Information
The shading of the above circle indicates a 38% market share for the strategic business unit. The arrow in the upward left direction indicates that the business unit is projected to gain strength relative to competitors, and that the business unit is in an industry that is projected to become more attractive. The tip of the arrow indicates the future position of the center point of the circle.
The following is an example of such a representation:
Resource allocation recommendations can be made to grow,
hold, or harvest a strategic business unit based on its position
on the matrix as follows:
Grow strong business units in attractive industries,
average business units in attractive industries, and strong
business units in average industries.
Hold average businesses in average industries, strong
businesses in weak industries, and weak business in
attractive industries.
Strategic Implications
Harvest weak business units in unattractive industries, average business units in unattractive industries, and weak business units in average industries.
There are strategy variations within these three groups. For example, within the harvest group the firm would be inclined to quickly divest itself of a weak business in an unattractive industry, whereas it might perform a phased harvest of an average business unit in the same industry.
LIMITATION GE
While the GE business screen represents an improvement over the more simple BCG growth-share matrix, it still presents a somewhat limited view by not considering interactions among the business units and by neglecting to address the core competencies leading to value creation. Rather than serving as the primary tool for resource allocation, portfolio matrices are better suited to displaying a quick synopsis of the strategic business units.
GE Mckinsey Matrix
HOLDLow
AVERAGE
High
WEAKAVERAGE
STR
- ONG
Bus Str Ind at
GROW
HOLD
HARVEST