Strategic Management

PMIR 2010-12, Course no: STMP10-3, Session 1

Introduction
–What is strategic management

–Vision, Mission and Objectives

–Levels of Strategy and Cascading

–Who Benefits from strategy?

–Value Creation and appropriation

 What is Strategic management?
Strategy is an integrated and coordinated set of commitments
and actions designed to exploit core competencies of firms and
gain competitive advantages to fulfill their objectives.

• Integrated – combining lower level units, capstone course

• Coordinated – integration requires co-ordination

• Commitments – No comeback, burning the bridge, stake

• Core competence and competitive advantage

In the domain of top
• Objective management
 What is Strategic management?
Other characteristics on strategy
• Paradigm – firms’ perspective
• Long term
• Large, overall impact
• Formulation (rational, plan, what questions) and
implementation (behavioral, process, how questions)
• Unique and special
• Strategy as a fit
 Vision, Mission and Objectives
VISION
Vision is a picture of what the firm wants to achieve, in broad
terms

Characteristics
• Big picture – guiding principle
• Reflects a firm’s value and aspiration
• Enduring
• Vague
• By founder/leader
 Vision, Mission and Objectives

Vision Statement
• Intended to capture heart and mind of employees and other
stakeholders
• Short and concise for ease of memorizing

Examples
• To make automobile accessible to every American – Henry
Ford
• Building the nation – Jamshetji Nusserwanji Tata
• To seize the opportunities of tomorrow and create a future that
will make us an EVA positive company – Tata Steel, Vision
2007
 Vision, Mission and Objectives
MISSION
Mission is the business specific proposition which helps the
firms achieve the vision

Characteristics
More specific than vision
By leaders/top managers

Examples:
• Beat Coke – PEPSI
• Become the dominant player in commercial aircraft and bring
the world into the jet age – Boeing (1950)
 Vision, Mission and Objectives
OBJECTIVE
Objective is the precise goal of what the firm wants to achieve

Characteristics
• Concrete – specified by numbers
• Includes profit, growth, net worth, size, market share, share
price, etc.
 Levels and Cascading of Strategy
Globe LEVELS OF
Business group/Conglomerate
STRATEGY
Region/Trade Bloc
Multidivisional firm
CASCADING
Nation
OF STRATEGY Business Unit
Local Regions
Functional Departments
State Goal/Mission
Groups
District Objective Strategy
Individuals
Village
Objective Strategy
Domain of Strategic
Management
Objective Strategy
 Stakeholders and Firm Strategy
STAKEHOLDERS

Types of Stakeholders
Internal – Employment contract, incomplete, hierarchical
External – Arms length transactions
Distal – legitimizing, usually no transaction

Contract with Stakeholders Innovation,

Bargaining
Inducement

Firm Stakeholder
Contribution
 Stakeholders and Firm Strategy
FIRM STRATEGY Strategic Imperatives:
ge •All stakeholders need to
e d
n o wl Employee contribute
s, k lty ,
ta tu ya
r, s n , lo dge •Maximize value of
e io le
, p ow p e rat know shareholders
n ey c oo
Mo rvice,
Se
Goods, services, reputation, knowledge
Money, Loyalty, Knowledge Customer
Firm
Confo
rmanc
rul Tax e t o so
es , cial we
and on C lfare n
Le f orms,
g r egu rm o CSR
& itim lat anc
res ac ion e t Legiti Pressure
ou y, ,C o m a
rce In cy group
Su as f r SR
pp tru
ort ctu
ral
Inducement Government
Contribution
 Stakeholders and Firm Strategy
FIRM STRATEGY

Converting resources and exchanging

them with stakeholders
Value creation = value appropriation by firm (for shareholders)*
+ value appropriation by other stakeholders
Bargaining power of firm vis-à-vis
stakeholders, long term policies

Benefactors of strategy – potentially all stakeholder

* Owners/shareholders have property right on the residual

value after other stakeholders have appropriated their parts.
They bear maximum risk and therefore has maximum
incentive for good performance of firms.
 Value Creation and Appropriation
VALUE CREATION IN EXCHANGE

A Resource B A Resource B
VBX VBX
VAX VAX
X X

VAY VAY
VBY VBY
Y Y

Value creation by transferring X from A to B = VBX - VAX To motivate

Value creation by transferring Y from B to A = VAY - VBY
an exchange
both parties
Value creation by exchange = (VBX – VBY) + (VAY - VAX) must gain
Value of resource owned Value of resource not owned
value
 Value Creation and Appropriation
VALUE APPROPRIATION IN BARGAINING

A Resource B A Resource B
VBX VBX
VAX VAX
X X

VAY VAY
VBY VBY
Y Y

Value creation by transferring 1 unit of X from A to B = VBX – VAX

Feasible range
of ‘r’ creates
Value creation by transferring r units of Y from B to A = r(VAY – VBY)
scope of
Value creation by exchange = (VBX – r.VBY) + (r.VAY – VAX) bargaining
For both parties to have positive value of exchange: VAX/VAY < r < VBX/VBY
If Y is 1 unit of money, then rY is price of X
 Value Creation and Appropriation
VALUE CREATION & APPROPRIATION IN BUSINESS
Which
FIRM exchange
creates
1 Kg Rice Rs. 30
Logistics & Rs. 6 1 Kg Rice firm
(at farm) Rs. 40 (at market) value?
Administrative
Rs. 25 service
Farmer Employee Customer Rs. 50
Factor
Cost
Rs.50 Customer’s
Utility Customer
Value
Rs.40 Sales price
Firm Value Firm Creation
Value Total Cost
Rs.36 by three
Addition Employee
Factor Cost exchanges
Rs.30 Purchase Price
Supplier
Rs.25 Supplier’s cost
of producing
VALUE APPROPRIATIONS