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STRATEGIC MANAGEMENT
Dr.V.V.S.K.PRASAD
PROFESSOR &HEAD
Prof.V.V.S.K.PRASAD
Prof.V.V.S.K.PRASAD
3 such changes on their own job and can effectively face the changes. The managers and employees must do appropriate things in appropriate manner. They need to be both effective as well as efficient. One of the major role of strategic management is to incorporate various functional areas of the organization completely, as well as, to ensure these functional areas harmonize and get together well. Another role of strategic management is to keep a continuous eye on the goals and objectives of the organization. Following are the important concepts of Strategic Management: Features Components of a Strategy Statement Strategic Management Process Environmental Scanning Strategy Formulation Strategy Implementation Strategy Formulation vs Implementation Strategy Evaluation Strategic Decisions Business Policy BCG Matrix SWOT Analysis Competitor Analysis Strategy - Definition and
Prof.V.V.S.K.PRASAD
Prof.V.V.S.K.PRASAD
5 Strategy is a well defined roadmap of an organization. It defines the overall mission, vision and direction of an organization. The objective of a strategy is to maximize an organizations strengths and to minimize the strengths of the competitors. Strategy, in short, bridges the gap between where we are and where we want to be.
Prof.V.V.S.K.PRASAD
6 statement differentiates an organization from others by explaining its broad scope of activities, its products, and technologies it uses to achieve its goals and objectives. It talks about an organizations present (i.e., about where we are).For instance, Microsofts mission is to help people and businesses throughout the world to realize their full potential. Wal-Marts mission is To give ordinary folk the chance to buy the same thing as rich people. Mission statements always exist at top level of an organization, but may also be made for various organizational levels. Chief executive plays a significant role in formulation of mission statement. Once the mission statement is formulated, it serves the organization in long run, but it may become ambiguous with organizational growth and innovations. In todays dynamic and competitive environment, mission may need to be redefined. However, care must be taken that the redefined mission statement should have original fundamentals/components. Mission statement has three main components-a statement of mission or vision of the company, a statement of the core values that shape the acts and behaviour of the employees, and a statement of the goals and objectives. Features of a Mission Mission must be feasible and attainable. It should be possible to achieve it. Mission should be clear enough so that any action can be taken. It should be inspiring for the management, staff and society at large. It should be precise enough, i.e., it should be neither too broad nor too narrow. It should be unique and distinctive to leave an impact in everyones mind. It should be analytical,i.e., it should analyze the key components of the strategy. It should be credible, i.e., all stakeholders should be able to believe it. Vision A vision statement identifies where the organization wants or intends to be in future or where it should be to best meet the needs of the stakeholders. It describes dreams and aspirations for future. For instance, Microsofts vision is to empower people through great software, any time, any place, or any device. Wal-Marts vision is to become worldwide leader in retailing. A vision is the potential to view things ahead of themselves. It answers the question where we want to be. It gives us a reminder
Prof.V.V.S.K.PRASAD
7 about what we attempt to develop. A vision statement is for the organization and its members, unlike the mission statement which is for the customers/clients. It contributes in effective decision making as well as effective business planning. It incorporates a shared understanding about the nature and aim of the organization and utilizes this understanding to direct and guide the organization towards a better purpose. It describes that on achieving the mission, how the organizational future would appear to be.
An effective vision statement must have following featuresIt must be unambiguous. It must be clear. It must harmonize with organizations culture and values. The dreams and aspirations must be rational/realistic. Vision statements should be shorter so that they are easier to memorize. In order to realize the vision, it must be deeply instilled in the organization, being owned and shared by everyone involved in the organization. Goals and objectives A goal is a desired future state or objective that an organization tries to achieve. Goals specify in particular what must be done if an organization is to attain mission or vision. Goals make mission more prominent and concrete. They co-ordinate and integrate various functional and departmental areas in an organization. Well made goals have following featuresThese are precise and measurable. These look after critical and significant issues. These are realistic and challenging. These must be achieved within a specific time frame. These include both financial as well as non-financial components.
Prof.V.V.S.K.PRASAD
8 Objectives are defined as goals that organization wants to achieve over a period of time. These are the foundation of planning. Policies are developed in an organization so as to achieve these objectives. Formulation of objectives is the task of top level management. Effective objectives have following featuresThese are not single for an organization, but multiple. Objectives should be both short-term as well as long-term. Objectives must respond and react to changes in environment, i.e., they must be flexible. These must be feasible, realistic and operational.
scanning refers to a process of collecting, scrutinizing and providing information for strategic purposes. It helps in analyzing the internal and external factors influencing an organization. After executing the environmental analysis process, management should evaluate it on a continuous basis and strive to improve it. 2. Strategy Formulation- Strategy formulation is the process of deciding best course of action for
accomplishing organizational objectives and hence achieving organizational purpose. After conducting environment scanning, managers formulate corporate, business and functional strategies. 3. Strategy Implementation- Strategy implementation implies making the strategy work as
intended or putting the organizations chosen strategy into action. Strategy implementation includes designing the organizations structure, distributing resources, developing decision making process, and managing human resources.
Prof.V.V.S.K.PRASAD
9 4. Strategy Evaluation- Strategy evaluation is the final step of strategy management process. The
key strategy evaluation activities are: appraising internal and external factors that are the root of present strategies, measuring performance, and taking remedial / corrective actions. Evaluation makes sure that the organizational strategy as well as its implementation meets the organizational objectives.
These components are steps that are carried, in chronological order, when creating a new strategic management plan. Present businesses that have already created a strategic management plan will revert to these steps as per the situations requirement, so as to make essential changes.
Prof.V.V.S.K.PRASAD
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Strategic management is an ongoing process. Therefore, it must be realized that each component interacts with the other components and that this interaction often happens in chorus.
As business becomes more competitive, and there are rapid changes in the external environment, information from external environment adds crucial elements to the effectiveness of long-term plans. As environment is dynamic, it becomes essential to identify competitors moves and actions. Organizations have also to update the core competencies and internal environment as per external environment. Environmental factors are infinite, hence, organization should be agile and vigile to accept and adjust to the environmental changes. For instance - Monitoring might indicate that an original forecast of the prices of the raw materials that are involved in the product are no more credible, which could imply the requirement for more focused scanning, forecasting and analysis to create a more trustworthy
Prof.V.V.S.K.PRASAD
11 prediction about the input costs. In a similar manner, there can be changes in factors such as competitors activities, technology, market tastes and preferences. While in external analysis, three correlated environment should be studied and analyzed immediate / industry environment national environment broader socio-economic environment / macro-environment Examining the industry environment needs an appraisal of the competitive structure of the organizations industry, including the competitive position of a particular organization and its main rivals. Also, an assessment of the nature, stage, dynamics and history of the industry is essential. It also implies evaluating the effect of globalization on competition within the industry. Analyzing the national environment needs an appraisal of whether the national framework helps in achieving competitive advantage in the globalized environment. Analysis of macro-environment includes exploring macroeconomic, social, government, legal, technological and international factors that may influence the environment. The analysis of organizations external environment reveals opportunities and threats for an organization. Strategic managers must not only recognize the present state of the environment and their industry but also be able to predict its future positions.
Setting Organizations objectives - The key component of any strategy statement is to set the long-term objectives of the organization. It is known that strategy is generally a medium for realization of organizational objectives. Objectives stress the state of being there whereas Strategy stresses upon the process of reaching there. Strategy includes both the fixation of objectives as well the medium to be
Prof.V.V.S.K.PRASAD
12 used to realize those objectives. Thus, strategy is a wider term which believes in the manner of deployment of resources so as to achieve the objectives. While fixing the organizational objectives, it is essential that the factors which influence the selection of objectives must be analyzed before the selection of objectives. Once the objectives and the factors influencing strategic decisions have been determined, it is easy to take strategic decisions. Evaluating the Organizational Environment - The next step is to evaluate the general economic and industrial environment in which the organization operates. This includes a review of the organizations competitive position. It is essential to conduct a qualitative and quantitative review of an organizations existing product line. The purpose of such a review is to make sure that the factors important for competitive success in the market can be discovered so that the management can identify their own strengths and weaknesses as well as their competitors strengths and weaknesses. After identifying its strengths and weaknesses, an organization must keep a track of competitors moves and actions so as to discover probable opportunities of threats to its market or supply sources. Setting Quantitative Targets - In this step, an organization must practically fix the quantitative target values for some of the organizational objectives. The idea behind this is to compare with long term customers, so as to evaluate the contribution that might be made by various product zones or operating departments. Aiming in context with the divisional plans - In this step, the contributions made by each department or division or product category within the organization is identified and accordingly strategic planning is done for each sub-unit. This requires a careful analysis of macroeconomic trends. Performance Analysis - Performance analysis includes discovering and analyzing the gap between the planned or desired performance. A critical evaluation of the organizations past performance, present condition and the desired future conditions must be done by the organization. This critical evaluation identifies the degree of gap that persists between the actual reality and the long-term aspirations of the organization. An attempt is made by the organization to estimate its probable future condition if the current trends persist.
Prof.V.V.S.K.PRASAD
13 Choice of Strategy - This is the ultimate step in Strategy Formulation. The best course of action is actually chosen after considering organizational goals, organizational strengths, potential and limitations as well as the external opportunities.
Prof.V.V.S.K.PRASAD
14 Excellently formulated strategies will fail if they are not properly implemented. Also, it is essential to note that strategy implementation is not possible unless there is stability between strategy and each organizational dimension such as organizational structure, reward structure, resource-allocation process, etc. Strategy implementation poses a threat to many managers and employees in an organization. New power relationships are predicted and achieved. New groups (formal as well as informal) are formed whose values, attitudes, beliefs and concerns may not be known. With the change in power and status roles, the managers and employees may employ confrontation behaviour.
Prof.V.V.S.K.PRASAD
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Measurement of performance - The standard performance is a bench mark with which the actual performance is to be compared. The reporting and communication system help in measuring the performance. If appropriate means are available for measuring the performance and if the standards are set in the right manner, strategy evaluation becomes easier. But various factors such as managers contribution are difficult to measure. Similarly divisional performance is sometimes difficult to measure as compared to individual performance. Thus, variable objectives must be created against which measurement of performance can be done. The measurement must be done at right time else evaluation will not meet its purpose. For measuring the performance, financial statements like - balance sheet, profit and loss account must be prepared on an annual basis. Analyzing Variance - While measuring the actual performance and comparing it with standard performance there may be variances which must be analyzed. The strategists must mention the degree of tolerance limits between which the variance between actual and standard performance may be accepted. The positive deviation indicates a better performance but it is quite unusual exceeding the target always. The negative deviation is an issue of concern because it indicates a shortfall in performance. Thus in this case the strategists must discover the causes of deviation and must take corrective action to overcome it. Taking Corrective Action - Once the deviation in performance is identified, it is essential to plan for a corrective action. If the performance is consistently less than the desired performance, the strategists must carry a detailed analysis of the factors responsible for such performance. If the strategists discover that the organizational potential does not match with the performance requirements, then the standards must be lowered. Another rare and drastic corrective action is reformulating the strategy which requires going back to the process of strategic management, reframing of plans according to new resource allocation trend and consequent means going to the beginning point of strategic management process.
Prof.V.V.S.K.PRASAD
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Prof.V.V.S.K.PRASAD
17 be made. Business policy also deals with acquisition of resources with which organizational goals can be achieved. Business policy is the study of the roles and responsibilities of top level management, the significant issues affecting organizational success and the decisions affecting organization in long-run. Features of Business Policy An effective business policy must have following featuresSpecific- Policy should be specific/definite. If it is uncertain, then the implementation will become difficult. Clear- Policy must be unambiguous. It should avoid use of jargons and connotations. There should be no misunderstandings in following the policy. Reliable/Uniform- Policy must be uniform enough so that it can be efficiently followed by the subordinates. Appropriate- Policy should be appropriate to the present organizational goal. Simple- A policy should be simple and easily understood by all in the organization. Inclusive/Comprehensive- In order to have a wide scope, a policy must be comprehensive. Flexible- Policy should be flexible in operation/application. This does not imply that a policy should be altered always, but it should be wide in scope so as to ensure that the line managers use them in repetitive/routine scenarios. Stable- Policy should be stable else it will lead to indecisiveness and uncertainty in minds of those who look into it for guidance. Difference between Policy and Strategy The term policy should not be considered as synonymous to the term strategy. The difference between policy and strategy can be summarized as followsPolicy is a blueprint of the organizational activities which are repetitive/routine in nature. While strategy is concerned with those organizational decisions which have not been dealt/faced before in same form. Policy formulation is responsibility of top level management. While strategy formulation is basically done by middle level management. Policy deals with routine/daily activities essential for effective and efficient running of an organization. While strategy deals with strategic decisions.
Prof.V.V.S.K.PRASAD
18 Policy is concerned with both thought and actions. While strategy is concerned mostly with action. A policy is what is, or what is not done. While a strategy is the methodology used to achieve a target as prescribed by a policy.
BCG Matrix
Boston Consulting Group (BCG) Matrix is a four celled matrix (a 2 * 2 matrix) developed by BCG, USA. It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for an organization to examine different businesses in its portfolio on the basis of their related market share and industry growth rates. It is a two dimensional analysis on management of SBUs (Strategic Business Units). In other words, it is a comparative analysis of business potential and the evaluation of environment. According to this matrix, business could be classified as high or low according to their industry growth rate and relative market share. Relative Market Share = SBU Sales this year leading competitors sales this year. Market Growth Rate = Industry sales this year - Industry Sales last year.
The analysis requires that both measures be calculated for each SBU. The dimension of business strength, relative market share, will measure comparative advantage indicated by market dominance. The key theory underlying this is existence of an experience curve and that market share is achieved due to overall cost leadership. BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical axis denoting market growth rate. The mid-point of relative market share is set at 1.0. if all the SBUs are in same industry, the average growth rate of the industry is used. While, if all the SBUs are located in different industries, then the mid-point is set at the growth rate for the economy.
Prof.V.V.S.K.PRASAD
19 Resources are allocated to the business units according to their situation on the grid. The four cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these cells represents a particular type of business.
10 x
0.1 x
Stars- Stars represent business units having large market share in a fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. SBUs located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. If successful, a star will become a cash cow when the industry matures. Cash Cows- Cash Cows represents business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. These SBUs are the corporations key source of cash, and are specifically the core business. They are the base of an organization. These businesses usually follow stability strategies. When cash cows loose their appeal and move towards deterioration, then a retrenchment policy may be pursued. Question Marks- Question marks represent business units having low relative market share and located in a high growth industry. They require huge amount of cash to maintain or gain market share. They
Prof.V.V.S.K.PRASAD
20 require attention to determine if the venture can be viable. Question marks are generally new goods and services which have a good commercial prospective. There is no specific strategy which can be adopted. If the firm thinks it has dominant market share, then it can adopt expansion strategy, else retrenchment strategy can be adopted. Most businesses start as question marks as the company tries to enter a high growth market in which there is already a market-share. If ignored, then question marks may become dogs, while if huge investment is made, then they have potential of becoming stars. Dogs- Dogs represent businesses having weak market shares in low-growth markets. They neither generate cash nor require huge amount of cash. Due to low market share, these business units face cost disadvantages. Generally retrenchment strategies are adopted because these firms can gain market share only at the expense of competitors/rival firms. These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number of dogs should be avoided and minimized in an organization. Limitations of BCG Matrix The BCG Matrix produces a framework for allocating resources among different business units and makes it possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such asBCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true nature of business may not be reflected. Market is not clearly defined in this model. High market share does not always leads to high profits. There are high costs also involved with high market share. Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability. At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes. This four-celled approach is considered as to be too simplistic.
Prof.V.V.S.K.PRASAD
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GE Matrix
The business portfolio is the collection of businesses and products that make up the company. The best business portfolio is one that fits the company's strengths and helps exploit the most attractive opportunities.
(1) Analyse its current business portfolio and decide which businesses should receive more or less investment, and
(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at the same time deciding when products and businesses should no longer be retained.
The two best-known portfolio planning methods are the Boston Consulting Group Portfolio Matrix and the McKinsey / General Electric Matrix (discussed in this revision note). In both methods, the first step is to identify the various Strategic Business Units ("SBU's") in a company portfolio. An SBU is a unit of the company that has a separate mission and objectives and that can be planned independently from the other businesses. An SBU can be a company division, a product line or even individual brands - it all depends on how the company is organised.
The McKinsey/GE Matrix overcomes a number of the disadvantages of the BCG Box. Firstly, market attractiveness replaces market growth as the dimension of industry attractiveness, and includes a broader range of factors other than just the market growth rate. Secondly, competitive
Prof.V.V.S.K.PRASAD
22 strength replaces market share as the dimension by which the competitive position of each SBU is assessed.
The diagram below illustrates some of the possible elements that determine market attractiveness and competitive strength by applying the McKinsey/GE Matrix to the UK retailing market:
Whilst any assessment of market attractiveness is necessarily subjective, there are several factors which can help determine attractiveness. These are listed below:
- Market Size - Market growth - Market profitability - Pricing trends - Competitive intensity / rivalry - Overall risk of returns in the industry
Prof.V.V.S.K.PRASAD
23 - Opportunity to differentiate products and services - Segmentation - Distribution structure (e.g. retail, direct, wholesale
- Strength of assets and competencies - Relative brand strength - Market share - Customer loyalty - Relative cost position (cost structure compared with competitors) - Distribution strength - Record of technological or other innovation - Access to financial and other investment resources
SWOT Analysis
SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By definition, Strengths (S) and Weaknesses (W) are considered to be internal factors over which you have some measure of control. Also, by definition, Opportunities (O) and Threats (T) are considered to be external factors over which you have essentially no control. SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic position of the business and its environment. Its key purpose is to identify the strategies that will create a firm specific business model that will best align an organizations resources and capabilities to the requirements of the environment in which the firm operates. In other words, it is the foundation for evaluating the internal potential and limitations and the probable/likely opportunities and threats from the external
Prof.V.V.S.K.PRASAD
24 environment. It views all positive and negative factors inside and outside the firm that affect the success. A consistent study of the environment in which the firm operates helps in forecasting/predicting the changing trends and also helps in including them in the decision-making process of the organization. An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given belowStrengths- Strengths are the qualities that enable us to accomplish the organizations mission. These are the basis on which continued success can be made and continued/sustained. Strengths can be either tangible or intangible. These are what you are well-versed in or what you have expertise in, the traits and qualities your employees possess (individually and as a team) and the distinct features that give your organization its consistency. Strengths are the beneficial aspects of the organization or the capabilities of an organization, which includes human competencies, process capabilities, financial resources, products and services, customer goodwill and brand loyalty. Examples of organizational strengths are huge financial resources, broad product line, no debt, committed employees, etc. Weaknesses- Weaknesses are the qualities that prevent us from accomplishing our mission and achieving our full potential. These weaknesses deteriorate influences on the organizational success and growth. Weaknesses are the factors which do not meet the standards we feel they should meet. Weaknesses in an organization may be depreciating machinery, insufficient research and development facilities, narrow product range, poor decision-making, etc. Weaknesses are controllable. They must be minimized and eliminated. For instance - to overcome obsolete machinery, new machinery can be purchased. Other examples of organizational weaknesses are huge debts, high employee turnover, complex decision making process, narrow product range, large wastage of raw materials, etc. Opportunities- Opportunities are presented by the environment within which our organization operates. These arise when an organization can take benefit of conditions in its environment to plan and execute strategies that enable it to become more profitable. Organizations can gain competitive advantage by making use of opportunities. Organization should be careful and recognize the opportunities and grasp them whenever they arise. Selecting the targets that will best serve the clients while getting desired results is a difficult task. Opportunities may arise from market, competition, industry/government and technology. Increasing demand for telecommunications accompanied by deregulation is a great opportunity for new firms to enter telecom sector and compete with existing firms for revenue.
Prof.V.V.S.K.PRASAD
25 Threats- Threats arise when conditions in external environment jeopardize the reliability and profitability of the organizations business. They compound the vulnerability when they relate to the weaknesses. Threats are uncontrollable. When a threat comes, the stability and survival can be at stake. Examples of threats are - unrest among employees; ever changing technology; increasing competition leading to excess capacity, price wars and reducing industry profits; etc. Advantages of SWOT Analysis SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it involves a great subjective element. It is best when used as a guide, and not as a prescription. Successful businesses build on their strengths, correct their weakness and protect against internal weaknesses and external threats. They also keep a watch on their overall business environment and recognize and exploit new opportunities faster than its competitors. SWOT Analysis helps in strategic planning in following mannerIt is a source of information for strategic planning. Builds organizations strengths. Reverse its weaknesses. Maximize its response to opportunities. Overcome organizations threats. It helps in identifying core competencies of the firm. It helps in setting of objectives for strategic planning. It helps in knowing past, present and future so that by using past and current data, future plans can be chalked out. SWOT Analysis provide information that helps in synchronizing the firms resources and capabilities with the competitive environment in which the firm operates.
Prof.V.V.S.K.PRASAD
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Limitations of SWOT Analysis SWOT Analysis is not free from its limitations. It may cause organizations to view circumstances as very simple because of which the organizations might overlook certain key strategic contact which may occur. Moreover, categorizing aspects as strengths, weaknesses, opportunities and threats might be very subjective as there is great degree of uncertainty in market. SWOT Analysis does stress upon the significance of these four aspects, but it does not tell how an organization can identify these aspects for itself. There are certain limitations of SWOT Analysis which are not in control of management. These includePrice increase; Inputs/raw materials; Government legislation; Economic environment; Searching a new market for the product which is not having overseas market due to import restrictions; etc. Internal limitations may includeInsufficient research and development facilities; Faulty products due to poor quality control;
Prof.V.V.S.K.PRASAD
Prof.V.V.S.K.PRASAD
28 To study the market trend and pattern; To develop strategy for organizational growth; When the organization is planning for the diversification and expansion plan; To study forthcoming trends in the industry; Understanding the current strategy strengths and weaknesses of a competitor can suggest
opportunities and threats that will merit a response; Insight into future competitor strategies may help in predicting upcoming threats and
opportunities. Competitors should be analyzed along various dimensions such as their size, growth and profitability, reputation, objectives, culture, cost structure, strengths and weaknesses, business strategies, exit barriers, etc.
Prof.V.V.S.K.PRASAD
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The five forces mentioned above are very significant from point of view of strategy formulation. The potential of these forces differs from industry to industry. These forces jointly determine the profitability of industry because they shape the prices which can be charged, the costs which can be borne, and the investment required to compete in the industry. Before making strategic decisions, the managers should use the five forces framework to determine the competitive structure of industry. Lets discuss the five factors of Porters model in detail: Risk of entry by potential competitors: Potential competitors refer to the firms which are not currently competing in the industry but have the potential to do so if given a choice. Entry of new players increases the industry capacity, begins a competition for market share and lowers the current costs. The threat of entry by potential competitors is partially a function of extent of barriers to entry. The various barriers to entry areEconomies of scale Brand loyalty Government Regulation Customer Switching Costs Absolute Cost Advantage
Prof.V.V.S.K.PRASAD
30 Ease in distribution Strong Capital base Rivalry among current competitors: Rivalry refers to the competitive struggle for market share between firms in an industry. Extreme rivalry among established firms poses a strong threat to profitability. The strength of rivalry among established firms within an industry is a function of following factors: Extent of exit barriers Amount of fixed cost Competitive structure of industry Presence of global customers Absence of switching costs Growth Rate of industry Demand conditions Bargaining Power of Buyers: Buyers refer to the customers who finally consume the product or the firms who distribute the industrys product to the final consumers. Bargaining power of buyers refer to the potential of buyers to bargain down the prices charged by the firms in the industry or to increase the firms cost in the industry by demanding better quality and service of product. Strong buyers can extract profits out of an industry by lowering the prices and increasing the costs. They purchase in large quantities. They have full information about the product and the market. They emphasize upon quality products. They pose credible threat of backward integration. In this way, they are regarded as a threat. Bargaining Power of Suppliers: Suppliers refer to the firms that provide inputs to the industry. Bargaining power of the suppliers refer to the potential of the suppliers to increase the prices of inputs( labour, raw materials, services, etc) or the costs of industry in other ways. Strong suppliers can extract profits out of an industry by increasing costs of firms in the industry. Suppliers products have a few substitutes. Strong suppliers products are unique. They have high switching cost. Their product is an important input to buyers product. They pose credible threat of forward integration. Buyers are not significant to strong suppliers. In this way, they are regarded as a threat. Threat of Substitute products: Substitute products refer to the products having ability of satisfying customers needs effectively. Substitutes pose a ceiling (upper limit) on the potential returns of an industry by putting a setting a limit on the price that firms can charge for their product in an industry.
Prof.V.V.S.K.PRASAD
31 Lesser the number of close substitutes a product has, greater is the opportunity for the firms in industry to raise their product prices and earn greater profits (other things being equal). The power of Porters five forces varies from industry to industry. Whatever be the industry, these five forces influence the profitability as they affect the prices, the costs, and the capital investment essential for survival and competition in industry. This five forces model also help in making strategic decisions as it is used by the managers to determine industrys competitive structure. Porter ignored, however, a sixth significant factor- complementaries. This term refers to the reliance that develops between the companies whose products work is in combination with each other. Strong complementors might have a strong positive effect on the industry. Also, the five forces model overlooks the role of innovation as well as the significance of individual firm differences. It presents a stagnant view of competition.
Prof.V.V.S.K.PRASAD
32 1. Protect the basic rights of the employees/workers. 2. Follow health, safety and environmental standards. 3. Continuously improvise the products, operations and production facilities to optimize the resource consumption 4. Do not replicate the packaging style so as to mislead the consumers. 5. Indulge in truthful and reliable advertising. 6. Strictly adhere to the product safety standards. 7. Accept new ideas. Encourage feedback from both employees as well as customers. 8. Present factual information. Maintain accurate and true business records. 9. Treat everyone (employees, partners and customers) with respect and integrity. 10. The mission and vision of the company should be very clear to it. 11. Do not get engaged in business relationships that lead to conflicts of interest. Discourage black marketing, corruption and hoarding. 12. Meet all the commitments and obligations timely. 13. Encourage free and open competition. Do not ruin competitors image by fraudulent practices. 14. The policies and procedures of the Company should be updated regularly. 15. Maintain confidentiality of personal data and proprietary records held by the company. 16. Do not accept child labour, forced labour or any other human right abuses.
Prof.V.V.S.K.PRASAD
33 Resources and capabilities are the building blocks upon which an organization create and execute valueadding strategy so that an organization can earn reasonable returns and achieve strategic competitiveness.
Resources are inputs to a firm in the production process. These can be human, financial, technological, physical or organizational. The more unique, valuable and firm specialized the resources are, the more possibly the firm will have core competency. Resources should be used to build on the strengths and remove the firms weaknesses. Capabilities refer to organizational skills at integrating its team of resources so that they can be used more efficiently and effectively. Organizational capabilities are generally a result of organizational system, processes and control mechanisms. These are intangible in nature. It might be that a firm has unique and valuable resources, but if it lacks the capability to utilize those resources productively and effectively, then the firm cannot create core competency. The organizational strategies may develop new resources and capabilities or it might make stronger the existing resources and capabilities, hence building the core competencies of the organization.
Prof.V.V.S.K.PRASAD
34 Core competencies help an organization to distinguish its products from its rivals as well as to reduce its costs than its competitors and thereby attain a competitive advantage. It helps in creating customer value. Also, core competencies help in creating and developing new goods and services. Core competencies decide the future of the organization. These decide the features and structure of global competitive organization. Core competencies give way to innovations. Using core competencies, new technologies can be developed. They ensure delivery of quality products and services to the clients.
Competitive advantage
Competitive Advantage - Definition A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. Competitive Strategies Following on from his work analysing the competitive forces in an industry, Michael Porter suggested four "generic" business strategies that could be adopted in order to gain competitive advantage. The four strategies relate to the extent to which the scope of a businesses' activities are narrow versus broad and the extent to which a business seeks to differentiate its products. The four strategies are summarised in the figure below:
Prof.V.V.S.K.PRASAD
35 The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry. Strategy - Differentiation This strategy involves selecting one or more criteria used by buyers in a market - and then positioning the business uniquely to meet those criteria. This strategy is usually associated with charging a premium price for the product - often to reflect the higher production costs and extra value-added features provided for the consumer. Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over other, less differentiated products. Examples of Differentiation Strategy: Mercedes cars; Bang & Olufsen Strategy - Cost Leadership With this strategy, the objective is to become the lowest-cost producer in the industry. Many (perhaps all) market segments in the industry are supplied with the emphasis placed minimising costs. If the achieved selling price can at least equal (or near)the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits. This strategy is usually associated with large-scale businesses offering "standard" products with relatively little differentiation that are perfectly acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share. Examples of Cost Leadership: Nissan; Tesco; Dell Computers Strategy - Differentiation Focus In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers. The important issue for any business adopting this strategy is to ensure
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36 that customers really do have different needs and wants - in other words that there is a valid basis for differentiation - and that existing competitor products are not meeting those needs and wants. Examples of Differentiation Focus: any successful niche retailers; (e.g. The Perfume Shop); or specialist holiday operator (e.g. Carrier) Strategy - Cost Focus Here a business seeks a lower-cost advantage in just on or a small number of market segments. The product will be basic - perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Such products are often called "me-too's". Examples of Cost Focus: Many smaller retailers featuring own-label or discounted label products.
This model is similar in some respects to the well-established Ansoff Model. However, it looks at growth strategy from a slightly different perspective.
The McKinsey model argues that businesses should develop their growth strategies based on:
Special relationships
Growth can be achieved by looking at business opportunities along several dimensions, summarised in the diagram below:
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37
Operational skills are the core competences that a business has which can provide the foundation for a growth strategy. For example, the business may have strong competencies in customer service; distribution, technology.
Privileged assets are those assets held by the business that are hard to replicate by competitors. For example, in a direct marketing-based business these assets might include a particularly large customer database, or a well-established brand.
Growth skills are the skills that businesses need if they are to successfully manage a growth strategy. These include the skills of new product development, or negotiating and integrating acquisitions.
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38 Special relationships are those that can open up new options. For example, the business may have specially string relationships with trade bodies in the industry that can make the process of growing in export markets easier than for the competition.
The model outlines seven ways of achieving growth, which are summarised below:
The lowest-risk option; try to increase sales to the existing customer base; this is about increasing the frequency of purchase and maintaining customer loyalty
Taking the existing customer base, the objective is to find entirely new products that these customers might buy, or start to provide products that existing customers currently buy from competitors
A combination of Ansoffs market development & diversification strategy taking a risk by developing and marketing new products. Some of these can be sold to existing customers who may trust the business (and its brands) to deliver; entirely new customers may need more persuasion
This option focuses on the use of distribution channels as a possible source of growth. Are there ways in which existing products and services can be sold via new or emerging channels which might boost sales?
New geographies
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39 With this method, businesses are encouraged to consider new geographic areas into which to sell their products. Geographical expansion is one of the most powerful options for growth but also one of the most difficult.
This option considers the possibility of acquiring troubled competitors or consolidating the industry through a general acquisition programme
This option requires a business to think about opportunities to integrate vertically or consider whether the skills of the business could be used in other industries.
The acronym stands for the Political, Economic, Social and Technological issues that could affect the strategic development of a business.
Identifying PEST influences is a useful way of summarising the external environment in which a business operates. However, it must be followed up by consideration of how a business should respond to these influences.
The table below lists some possible factors that could indicate important environmental influences for a business under the PEST headings:
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40 Political / Legal Environmental regulation and protection Economic Economic growth (overall; by industry sector) Taxation (corporate; consumer) Monetary policy (interest rates) Social Income distribution Technological Government spending on
(change in distribution of research disposable income; Demographics (age structure of the population; gender; family size and composition; changing nature of occupations) Government and industry focus on technological effort
Government spending Labour / social mobility (overall level; specific spending priorities)
Consumer protection
Employment law
Taxation (impact on
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Government organisation / Exchange rates attitude (effects on demand by overseas customers; effect on cost of imported components) Competition regulation Inflation (effect on costs and selling prices)
Education
Stage of the business Health & welfare cycle (effect on shortterm business performance) Economic "mood" Living conditions
Internet!
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42
Va l u e c h a i n a n a l ys i s
Introduction
Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings:
(1) Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly); and
(2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities.
Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced").
What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used.
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43 Primary Activities
Primary Activity
Description
Inbound logistics All those activities concerned with receiving and storing externally sourced materials Operations The manufacture of products and services - the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products) Outbound logistics Marketing and sales Service Essentially an information activity - informing buyers and consumers about products and services (benefits, use, price etc.) All those activities associated with maintaining product performance after the product has been sold Support Activities All those activities associated with getting finished goods and services to buyers
Description
This concerns how resources are acquired for a business (e.g. sourcing and negotiating with materials suppliers)
Human Resource Those activities concerned with recruiting, developing, motivating and rewarding Management the workforce of a business
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Activities concerned with managing information processing and the development and protection of "knowledge" in a business Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management
Value chain analysis can be broken down into a three sequential steps:
(1) Break down a market/organisation into its key activities under each of the major headings in the model;
(2) Assess the potential for adding value via cost advantage or differentiation, or identify current activities where a business appears to be at a competitive disadvantage;
(3) Determine strategies built around focusing on activities where competitive advantage can be sustained
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45 While some models of organizational effectiveness go in and out of fashion, one that has persisted is the McKinsey 7S framework. Developed in the early 1980s by Tom Peters and Robert Waterman, two consultants working at the McKinsey & Company consulting firm, the basic premise of the model is that there are seven internal aspects of an organization that need to be aligned if it is to be successful. The 7S model can be used in a wide variety of situations where an alignment perspective is useful, for example to help you: Improve the performance of a company. Examine the likely effects of future changes within a company. Align departments and processes during a merger or acquisition. Determine how best to implement a proposed strategy. The McKinsey 7S model can be applied to elements of a team or a project as well. The alignment issues apply, regardless of how you decide to define the scope of the areas you study. The Seven Elements The McKinsey 7S model involves seven interdependent factors which are categorized as either "hard" or "soft" elements: Hard Elements Soft Elements
"Hard" elements are easier to define or identify and management can directly influence them: These are strategy statements; organization charts and reporting lines; and formal processes and IT systems.
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46 "Soft" elements, on the other hand, can be more difficult to describe, and are less tangible and more influenced by culture. However, these soft elements are as important as the hard elements if the organization is going to be successful. The way the model is presented in Figure 1 below depicts the interdependency of the elements and indicates how a change in one affects all the others.
Let's look at each of the elements specifically: Strategy: the plan devised to maintain and build competitive advantage over the competition. Structure: the way the organization is structured and who reports to whom. Systems: the daily activities and procedures that staff members engage in to get the job done. Shared Values: called "superordinate goals" when the model was first developed, these are the core values of the company that are evidenced in the corporate culture and the general work ethic. Style: the style of leadership adopted.
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47 Staff: the employees and their general capabilities. Skills: the actual skills and competencies of the employees working for the company. Placing Shared Values in the middle of the model emphasizes that these values are central to the development of all the other critical elements. The company's structure, strategy, systems, style, staff and skills all stem from why the organization was originally created, and what it stands for. The original vision of the company was formed from the values of the creators. As the values change, so do all the other elements. How to Use the Model Now you know what the model covers, how can you use it? The model is based on the theory that, for an organization to perform well, these seven elements need to be aligned and mutually reinforcing. So, the model can be used to help identify what needs to be realigned to improve performance, or to maintain alignment (and performance) during other types of change. Whatever the type of change restructuring, new processes, organizational merger, new systems, change of leadership, and so on the model can be used to understand how the organizational elements are interrelated, and so ensure that the wider impact of changes made in one area is taken into consideration. You can use the 7S model to help analyze the current situation (Point A), a proposed future situation (Point B) and to identify gaps and inconsistencies between them. It's then a question of adjusting and tuning the elements of the 7S model to ensure that your organization works effectively and well once you reach the desired endpoint. Sounds simple? Well, of course not: Changing your organization probably will not be simple at all! Whole books and methodologies are dedicated to analyzing organizational strategy, improving performance and managing change. The 7S model is a good framework to help you ask the right questions but it
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48 won't give you all the answers. For that you'll need to bring together the right knowledge, skills and experience. When it comes to asking the right questions, we've developed a Mind Tools checklist and a matrix to keep track of how the seven elements align with each other. Supplement these with your own questions, based on your organization's specific circumstances and accumulated wisdom. 7S Checklist Questions Here are some of the questions that you'll need to explore to help you understand your situation in terms of the 7S framework. Use them to analyze your current (Point A) situation first, and then repeat the exercise for your proposed situation (Point B). Strategy: What is our strategy? How do we intend to achieve our objectives? How do we deal with competitive pressure? How are changes in customer demands dealt with? How is strategy adjusted for environmental issues? Structure: How is the company/team divided? What is the hierarchy? How do the various departments coordinate activities? How do the team members organize and align themselves? Is decision making and controlling centralized or decentralized? Is this as it should be, given what we're doing? Where are the lines of communication? Explicit and implicit?
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49 Systems: What are the main systems that run the organization? Consider financial and HR systems as well as communications and document storage. Where are the controls and how are they monitored and evaluated? What internal rules and processes does the team use to keep on track? Shared Values: What are the core values? What is the corporate/team culture? How strong are the values? What are the fundamental values that the company/team was built on? Style: How participative is the management/leadership style? How effective is that leadership? Do employees/team members tend to be competitive or cooperative? Are there real teams functioning within the organization or are they just nominal groups? Staff: What positions or specializations are represented within the team? What positions need to be filled? Are there gaps in required competencies? Skills: What are the strongest skills represented within the company/team? Are there any skills gaps?
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50 What is the company/team known for doing well? Do the current employees/team members have the ability to do the job? How are skills monitored and assessed? 7S Matrix Questions Using the information you have gathered, now examine where there are gaps and inconsistencies between elements. Remember you can use this to look at either your current or your desired organization. Click here to download our McKinsey 7S Worksheet, which contains a matrix that you can use to check off alignment between each of the elements as you go through the following steps: Start with your Shared Values: Are they consistent with your structure, strategy, and systems? If not, what needs to change? Then look at the hard elements. How well does each one support the others? Identify where changes need to be made. Next look at the other soft elements. Do they support the desired hard elements? Do they support one another? If not, what needs to change? As you adjust and align the elements, you'll need to use an iterative (and often time consuming) process of making adjustments, and then re-analyzing how that impacts other elements and their alignment. The end result of better performance will be worth it.
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