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Strategy refers to the plans made and action taken to enable an organization to fulfill its indented objectives Strategy is managements game plan for strengthening the organizations position, pleasing customers, and achieving performance targets.
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No roadmap to manage by
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Good strategy and good strategy execution are the most trustworthy signs of good management.
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Vision Company Mission Company Profile Recognizing and evaluating external and internal environment. Strategic Analysis and Choice Strategy Formulation Strategy Implementation Evaluation of performance
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Commitments
Decisions
Actions
Strategic Competitiveness
Sustained Competitive Advantage Above-Average Returns
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Strategic Competitiveness
Achieved when a firm successfully formulates and implements a value-creating strategy
Above-Average Returns
Returns in excess of what an investor expects to earn from other investments with similar risk
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Broad or narrow product line? Amount of customer service provided? Concentrate on a single business strategy? Diversify into related or unrelated industries? Expand globally?
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How to respond to changing industry and market conditions How best to capitalize on new opportunities How to manage each functional piece of the business How to achieve strategic and financial objectives
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Internal Analysis Identifies and evaluates resources, capabilities, and core competencies Looks at the organizations
o o o o
It is the only way to identify an organizations strengths and weaknesses Its needed for making good strategic decisions
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1.
The premise behind value chain analysis is that customers demand value from goods and services they obtain Customer value
Product is unique and different Product is low priced Quick response to specific or distinctive customer needs
Inbound logistics
Operations
Outbound logistics
Service
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Operations
Equipment comparison to competitors Plant layout Production control system Level of automation in production processes
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Technological Development
R&D activities in product and process innovations Relationship between R&D and other departments Meeting deadlines in technological development activities Quality of labs and other research facilities Qualifications of lab technicians and scientists Creativity and innovation in organizational culture
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Within the organization's strategic context specify the decisions to be made, Select, gather and analysis the most relevant data about the organization, its environment, operations and people. Based on these data, formulate conclusions about the organization its environment, operations and people. Determine and appraise feasible alternatives, weighing risks and opportunities. Select the most appropriate alternative. Implement the selected alternative and monitor results.
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Interrelationships among activities within the firm Relationships among activities within the firm and with other organizations (e.g., customers and suppliers)
P/ O ENVIRONMENTAL INPUTS
R an d MD
HR ENVIRONMENTAL OUTPUT
MI S
ENVIRONMENT
Tangible Resources
Relatively easy to identify, and include physical and financial assets used to create value for customers Financial resources
Firms
Physical resources
Modern
plant and facilities Favorable manufacturing locations State-of-the-art machinery and equipment
Tangible Resources
Technological resources
Trade
Organizational resources
Effective
Intangible Resources
Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time
Reputation
Effective
Intangible Resources
Human
Experience Trust Managerial
Organizational Capabilities
Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end
Outstanding customer service Excellent product development capabilities Innovativeness of products and services Ability to hire, motivate, and retain human capital
Core Competencies
For a strategic capability to be a Core Competency, it must be:
Valuable
Rare Costly to Imitate No substitutable
Enable a firm to formulate and implement strategies that improve its efficiency or effectiveness
may be able to substitute a similar resource that enables it to develop and implement the same strategy Very different firm resources can become strategic substitutes (such as e-business as a substitute for physical retail facility)
Yes
Yes
Yes
Yes
No
Yes
No
Yes
Source; Adapted from J. Barney, Firm Resources a Sustained Competitive Advantage, Journal of Management 17 (1991), pp. 99-120.
How do we effectively manage current core competencies while simultaneously developing new ones? How do we assemble bundles of resources, capabilities and core competencies to create value for customers? How do we learn to change rapidly?
The firms capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firms tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.
Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage.
Liquidity ratios measure a firms ability to meet its current financial obligations. Liquidity Ratios include:
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While not technically a ratio, Net Working Capital (NWC) is a key element for internal control. The higher this number the better. NWC is found by subtracting current liabilities from current assets. This is a sign of growing assets while keeping their liabilities stable.
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Current Ratio
The Current Ratio is a direct evaluation of a companys liquidity. The higher this value, the more liquid a firms resources are. Current Ratio is found by dividing current assets by current liabilities. This could be improved by lowering the reliance on debt financing.
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Quick Ratio
The Quick Ratio is comparable to the Current Ratio except that it takes inventory levels into consideration. This is found by subtracting inventories from current assets and then dividing by current assets.
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Activity Ratios are used to measure the speed with which accounts are converted into cash. Activity Ratios include:
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Inventory Turnover
Inventory Turnover is measurement of a firms inventory liquidity. This is found by cost of goods sold(COGS) by inventory. Generally a lower number is better.
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Total Asset Turnover illustrates the firms ability and proficiency in using its assets to generated sales. It is found by dividing sales by total assets, and is measured in times per year When using cross-sectional analysis, a company must take special care in comparing Total Asset Turnover because new assets tend to have lower turnover.
A companys debt position is a measure of how much of the firms profits are generated using money borrowed from other companies or individuals. Debt Ratios include:
The Financial Leverage Multiplier (FLM) is used to convert the companys Return On Assets to its Return on Equity. This reflects the impact of leverage, or use of debt, on owners return. It is the ratio of total assets to stockholders equity.
Profitability Ratios evaluate a companys earnings with respect to sales, assets, owners investments and share values. Profitability Ratios include
Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Total Assets Return on Equity
The Gross Profit Margin(GPR) is the percentage of each sales dollar that remains after the firm has paid for the goods sold. It is found by subtracting COGS from sales and dividing by sales.
Net Profit Margin(NPR), one of the most popular indicators of company health, measures the percentage of sales revenue remaining after ALL expenses are paid. NPR is found by dividing net profits by sales
Return of Total Assets(ROA), also known as return on investment, measures a firms effectiveness at generating profits with its assets. ROA is found by dividing the net profits after taxes by total assets.
Return on Equity
The Return on Equity(ROE) is extremely important to potential investors. ROE is found by dividing net profit by owners equity.