1 What is Strategic Management?

Strategic management is a systematic approach to analyzing the environment, assessing the organizations strengths and weaknesses, and identifying opportunities that would give the organization a (sustainable) competitive advantage, and consequently accomplish earning above-average returns. Competitive Advantage occurs when a firm implements a value-creating strategy of which other companies are unable to duplicate the benefits or find it too costly to imitate. Above-average Returns are returns in excess of what an investor expects to earn from other investments with a similar amount of risk. Purposes of Strategic management It is involved in many of the decisions managers make. Companies with formal strategic management systems were found to have higher financial returns than did companies with no such systems. Helps managers pinpoint important issues, and design appropriate strategic responses The Strategic Management Process The Strategic Management Process is an eight-step process that encompasses planning, implementation, and evaluation. It is a full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and above-average returns. STEP 1. Identifying the Organizations Current Mission, Objectives, and Strategies The Companys Mission Every organization needs a mission that defines its purpose and answers the question: What is our reason for being in the business? Defining the organizations mission forces managers to identify the scope of its products or services carefully. Even non-profit organizations can benefit in determining the purpose or reason for their business.

The Companys Objectives and Strategies Objectives are the foundation of planning. A companys objectives provide the measurable performance targets that workers strive to reach. Knowing the current objectives (and strategies) gives managers a basis for deciding whether those objectives (and strategies) need to be changed.

2 MISSION STATEMENT COMPONENTS

1. 2. Customer Market Product and Service We believe our first responsibility is to the doctors, nurses and patients, to mothers and all others who use our products and services (Johnson & Johnson) AMAXs principal products are molybdenum, coal, iron ore, copper, lead, zinc, petroleum and natural gas, potash, phosphates, nickel, tungsten, silver, gold and magnesium (AMAX) We are dedicated to the total success of Corning Glass Works as a worldwide competitor. (Corning Glass) Control Data is in the business of applying microelectronics and computer technology in two general areas: computer-related hardware and computingenhancing services which include computation, information, education, and finance. (Control Data) In this respect, the company will conduct its operations prudently and will provide the profits and growth which will assure Hoovers ultimate success. (Hoover Universal) We believe human development to be the worthiest of goals of civilization and independence to be the superior condition for nurturing growth in the capabilities of people. (Sun Company) Hoover Universal is a diversified, multi-industry corporation with strong manufacturing capabilities, entrepreneurial policies, and individual business unit autonomy. (Hoover Universal) Also, we must be responsive to the broader concerns of the public, including especially the general desire for improvement in the quality of life, equal opportunity for all and the constructive use of natural resources. (Sun Company)

3. 4.

Geographical Domain Technology

5.

Concern for Survival

6.

Philosophy

7.

Self-concept

8.

Concern for public image

Fig. 1 Mission Statement Components STEP 2. Analyzing the External Environment The external environment is described as a primary constraint on a managers actions. The term environment refers to institutions or forces that are outside the organization and potentially affect the organizations performance. An organizations environment, to a large degree, defines managements available options. Analyzing the organizations environment, for example, is needing to know what the competition is doing, what pending legislation might affect the organization, and what the labor supply is like in locations where it operates.

Economic

Demographic

Industry Environment Threat of new entrants Power of suppliers Power of buyers Product substitutes Intensity of rivalry

Sociocultural

Competitor Environment

Political/Legal

Global

Technological

Fig. 2 The External Environment STEP 3. Identifying Opportunities and Threats After analyzing the environment, management needs to assess what it has learned in terms of opportunities that the organization can exploit and threats it faces. Opportunities are conditions in the general environment that may help a company achieve strategic competitiveness. Threats are conditions in the general environment that may hinder a companys efforts to achieve strategic competitiveness. To analyze the general environment, several sources are used. Included among these are a wide variety of printed materials (e.g., trade publications, newspapers, business publications, the results of academic research and of public polls); attendance and participation in trade shows; the content of conversations with suppliers, customers, and employees of public-sector organizations; and, business-related rumors provided by many different people. Additional sources of information and data include individuals in boundary spanning positions who interact with external constituents such as salespersons, purchasing managers, public relations directors, and human resource managers. Decision makers should verify the validity and reliability of the sources on which their environmental analyses are based.

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Components of the External Analysis Identifying early signals of environmental changes and trends Detecting meaning through ongoing observations of environmental change and trends Developing projections of anticipated outcomes based on monitored changes and trends Determining the timing and importance of environmental changes and trends for firms strategies and their management

Scanning Monitoring Forecasting Assessing

Fig. 3 Components of the External Analysis Scanning entails the study of all segments in the general environment. Through scanning, firms identify early signals of potential changes in the general environment and detect changes that are already under way. When scanning, analysts typically deal with ambiguous, incomplete, and unconnected information and data. Environmental scanning has been found critically important for effective performance in firms that operate in highly volatile environment. Monitoring When monitoring, analysts observe environmental changes to see if, in fact, an important trend is emerging, and if so, whether other information and data should be studied to monitor it. Forecasting When forecasting, analysts develop feasible projections of what might happen, and how quickly, as a result of the changes and trends detected through scanning and monitoring. Assessing The objective of assessing is to determine the timing and significance of the effects of environmental changes and trends on the strategic management of a firm. Through scanning, monitoring, and forecasting, analysts are able to understand the general environment. Going a step further, the intent of assessment is to specify the implications of that understanding for the organization. Without assessment, analysts are left with data that are interesting but of unknown relevance. Case Sample: Cebu Pacific vs. other airlines. Cebu Pacific has made a hit by grabbing the opportunity to go venture into waters that the others have not been. STEP 4. Analyzing the Organizations Resources This step answers the questions like: What skills and abilities do the organizations employees have? What resources does the organization have? Has it been successful at innovating new products? What is the organizations cash flow? How do consumers perceive the organization and the quality of its products or services? This step forces managers to recognize that every organization, no matter how large or powerful, is constrained in some way by the resources and skills it has available. Internal analysis provides important information about an organizations specific assets, skills, and work activities. Resources are inputs into a firms production process such as capital equipment, the skills of individual employees, patents, finance, and talented managers. A firms production technology, if not protected by patents or other constraints, can be purchased or imitated by competitors, but when that production technology is integrated with other resources to form a capability, a core competence may develop that

5 results in competitive advantage. Thus, a competitive advantage can be created through the unique bundling of several resources; physical assets alone usually cannot provide a firm with sustainable competitive advantage. Some of the firms resources are tangible; others are intangible. Tangible resources are assets that can be seen and quantified. Intangible resources range from the intellectual property rights of patents, trademarks, and copyrights to the people-dependent or subjective resources of know-how, networks, organizational culture, and a firms reputation for its goods or services and the ways it interacts with people. Tangible Resources Financial Resources Physical Resources Human Resources

Organizational Resources

The firms borrowing capacity The firms ability to generate internal funds Sophistication and location of a firms plant and equipment Access to raw materials The training, experience, judgment, intelligence, insights, adaptability, commitment, and loyalty of a firms individual managers and workers The firms formal reporting structure and its formal planning, controlling, and coordinating systems Fig. 4 Tangible Resources

Intangible Resources Technological Resources

Resources for Innovation Reputation

Stock of technology such as patents, trademarks, copyrights, and trade secrets Knowledge required to apply it successfully Technical employees Research facilities Reputation with customers Brand name Perceptions of product quality, durability and reliability Reputation with suppliers For efficient, effective, supportive, and mutually beneficial interactions and relationships Fig. 5 Intangible Resources

Capabilities Capability is the capacity for a set of resources to integratively perform a task or activity. Capabilities are unique combinations of the firms information-based tangible resources and/or intangible resources and are what the firm is able to do as a result of resources working together. Capabilities are often based on developing, carrying, and exchanging information and knowledge through the firms human capital. Thus, the firms knowledge base is embedded in and reflected by its capabilities and is a key source of advantage in the competitive landscape.

6 Core competencies are the organizations major value-creating skills, capabilities, and resources that determine the organizations competitive weapons. Core competencies emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities. Not all of a firms resources and capabilities are strategic assetsthat is, assets that have competitive value and the potential to serve as a source of competitive advantage. Some resources and capabilities may result in incompetence because they represent competitive areas in which the firm is weak compared to competitors. Thus, some resources or capabilities may stifle or prevent the development of a core competence. Difficult managerial decisions concerning resources, capabilities, and core competencies are characterized by three conditions: uncertainty, complexity and intraorganizational conflicts. Managers face uncertainty in terms of the emergence of new proprietary technologies, rapidly changing economic and political trends, changes in societal values, and shifts in customer demands. Such environmental uncertainty increases the complexity and the range of issues managers examine when studying the internal environment. Managerial biases about how to cope with uncertainty affect decisions about the resources and capabilities that will become the foundation of the firms competitive advantage. Finally, intraorganizational conflict surfaces when decisions are made about core competencies that are to be nurtured and about how the nurturing is to take place. When making decisions affected by these three conditions, managers should use their judgment. Judgment is a capacity for making successful decisions when no obviously correct model or rule is available or when relevant data are unreliable or incomplete. Conditions Affecting Managerial Decisions about Resources, Capabilities and Core Competencies Uncertainty regarding characteristics of the general and the industry (or specific) environments, competitors actions, and customers preferences Complexity regarding the interrelated causes shaping a firms environments and perceptions of the environments. Intraorganizational Conflicts among people making managerial decisions and those affected by them Fig. 6 Conditions Affecting Managerial Decisions about Resources, Capabilities and Core Competencies STEP 5. Identifying Strengths and Weaknesses Internal analysis should lead to a clear assessment of the organizations resources and point out the organizations capabilities in performing the different functional activities. Any activities the organization does well or any resources that it has available are called strengths. Weaknesses are activities the organization does not do well or the resources it needs but does not possess. Culture Managers should be aware that strong and weak cultures have different effects on strategy and that the content of a culture has a major effect on the chosen strategy.

7 Culture (organizations personality) reflects the values, beliefs, attitudes and valued behaviors that embody the way things are done in the organization. Having a strong culture makes it easy for managers to convey to new employees the organizations distinctive competence. Its also more difficult to change. A strong culture may act as a significant barrier to acceptance of a change in the organizations strategies. Cultures also differ in the degree to which they encourage risk taking, exploit innovation, and reward performance. o Example: In a risk-aversive culture, for example, managers are likely to favor strategies that are defensive, that minimize financial exposure, and that react to changes in the environment rather than try to anticipate those changes. Organizational culture can also promote or hinder an organizations strategic actions. Strategically appropriate culture one that supports the firms chosen strategy outperformed selected other corporations with less appropriate cultures, according to one study. Outcomes from External and Internal Environmental Analyses By studying the external environment, By studying the internal environment, firms identify firms determine What they might choose to do What they can do Fig. 7 Outcomes from External and Internal Environmental Analyses The SWOT Analysis The merging of Steps 3 and 5 results in an assessment of the organizations internal resources and abilities, and opportunities in its external environment. This is frequently called SWOT analysis because it brings together the organizations Strengths, Weaknesses, Opportunities, and Threats in order to identify a strategic niche that the organization might exploit. STEP 6. Formulating Strategies Strategies need to be established for the corporate, business, and functional levels. The formulation of these strategies follows the decision-making process. Managers need to develop and evaluate strategic alternatives and then select strategies that are compatible at each level and that allow the organization to best capitalize on its strengths and environmental opportunities. This step requires careful evaluation of the competitive forces within the organizations industry and an assessment of appropriate competitive strategies. This step is complete when managers have developed a set of strategies that will give the organization a relative advantage over its rivals, but successful managers will choose strategies that give the most favorable advantage, then they will try to sustain that advantage over time. STEP 7. Implementing Strategies A strategy is only as good as its implementation. No matter how effectively a company has planned its strategies, it cannot succeed if the strategies are not implemented properly.

8 There are several ways of implementing strategies, most of which depend on the structure of the organization. STEP 8. Evaluating Results The final step in the strategic management process is evaluating results. How effective have our strategies been? What adjustments, if any, are necessary? When effective strategy formulation and implementation occur, the result is strategic advantage. As a summary: the strategic management process is the full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn above-average returns. Relevant strategic inputs, from the analyses of the internal and external environments, are necessary for effective strategy formulation and strategy implementation actions. In turn, effective strategic actions are a prerequisite to achieving the desired outcomes of strategic competitiveness and above-average returns. Thus, the strategic management process is used to match the conditions of an ever-changing market and competitive structure with a firms continuously evolving resources, capabilities, and competencies. Effective strategic actions that take place in the context of carefully integrated strategy formulation and strategy implementation processes result in desired strategic outcomes.
The External Environment

Strategic Inputs

Strategic Intent Strategic Mission

The Internal Environment

Strategy Formulation
Business-Level Strategy Competitive Dynamics Corporate-Level Strategy

Strategy Implementation
Corporate Governance Organizational Structure and Controls

Strategic Actions

Acquisition and Restructuring Strategies

International Strategy

Cooperative Strategy

Strategic Leadership

Corporate Entrepreneurship and Innovation

Strategic Outcomes

Strategic Competitiveness Above-Average Returns Feedback

Fig. 8 The Strategic Management Process

9 Strategy Formulation and Implementation Strategy Formulation Business-level Strategy A business level strategy is an integrated and coordinated set of commitments and actions designed to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets. Competitive Dynamics Competitive dynamics results from a series of competitive actions and competitive responses among firms competing within a particular industry. (i.e. GMA Network, ABSCBN, and TV5) Corporate-level Strategy A corporate-level strategy is action taken to gain a competitive advantage through the selection and management of a mix of businesses competing in several industries or product markets. Acquisition and Restructuring Strategies An acquisition is a transaction in which one firm buys controlling or 100% interest in another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary business within its portfolio. Restructuring refers to changes in the composition of a firms set of businesses and/or financial structure. Much restructuring has entailed downsizing and the divestiture of businesses. Merger A merger is a transaction in which two firms agree to integrate their operations on a relatively co-equal basis because they have resources and capabilities that together may create a stronger competitive advantage. Takeover A takeover is an acquisition in which the target firm did not solicit the bid of the acquiring firm. International Strategy An international strategy refers to the selling of products in markets outside the firms domestic market. (i.e., Electronics and clothing industries have moved portions of their operations to foreign locations in pursuit of lower costs.) Cooperative Strategy Cooperative strategy involves joint ventures, alliances, or partnerships to fend off competition. Strategic alliances Strategic alliances are partnerships between firms whereby their resources, capabilities, and core competencies are combined to pursue mutual interests in developing, manufacturing, or distributing goods or services. Joint venture A joint venture is when two or more firms create an independent company, with each of the partners typically owning equal shares in the new enterprise. Equity strategic alliance An equity strategic alliance consists of partners who own different percentages of equity in the new venture.

10 Nonequity strategic alliance Nonequity strategic alliances are formed through contact agreements given to a company to supply, produce, or distribute a firms goods or services without equity sharing. Strategy Implementation Corporate Governance Corporate governance is a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations. At its core, corporate governance is concerned with identifying ways to ensure that strategic decisions are made effectively. Additionally, governance can be thought of as a means used in corporations to establish order between parties (the firms owners and its top-level managers) whose interests may be in conflict. Organizational Structure and Controls Organizational structure is a firms formal role configuration, procedures, governance and control mechanisms, and authority and decision-making process. Influenced by situational factors including company size and age, organizational structure reflects managers determination of what the firm does and how it completes that work given its chosen strategies. Strategic competitiveness can be attained only when the firms selected structure is congruent with its formulated strategy. Strategic Leadership Strategic leadership is the ability to anticipate, envision, maintain flexibility, and empower others to create strategic change as necessary. Multifunctional in nature, strategic leadership involves managing through others, managing an entire enterprise rather than a functional subunit, and coping with change that seems to be increasing exponentially in todays new competitive landscape. Strategic leaders must learn how to influence human behavior effectively in an uncertain environment. By word and/or personal example and through their ability to dream pragmatically, effective strategic leaders meaningfully influence the behaviors, thoughts, and feelings of those with whom they work. The ability to manage human capital may be the most critical of the strategic leaders skills. Corporate Entrepreneurship and Innovation Corporate entrepreneurship is the set of capabilities possessed by a firm to produce or acquire new goods or services and manage the innovation process. It includes the commitments, mindsets, and actions firms take to develop and manage innovations. Corporate entrepreneurship is based on effective product design and successful commercialization. Because it is a set of capabilities that results in the effective and efficient design and manufacture of products, corporate entrepreneurship can be a basis for strategic competitiveness. Entrepreneurs seek to create the future. To do so, they must take risks and be aggressive, proactive, and innovative. Furthermore, they must identify anomalies in markets or opportunities where no current market exists. Another important feature of entrepreneurship is growth. Effective entrepreneurial firms are fast-growth businesses, and these fast-growth firms create new businesses. Innovation Innovation is the process of creating a commercial product from invention. Invention Invention is the act of creating or developing a new product or process idea. Imitation imitation is adoption of the innovation by similar firms.

11 Types of Organizational Strategies Small organizations may have a single strategist. In many cases, this person owns the firm and is deeply involved with its daily operations. At the other extreme, large, diversified firms have many top-level managers. In addition to the CEO and other top-level officials, they have managers who are responsible for the performance of individual business units. Managers at the top level of the organization typically are responsible for corporate-level strategies. Managers at the middle level typically are responsible for business-level strategies, and managers at the lower levels of the organization typically are responsible for the functional level strategies. Levels of Organizational Strategy

Multibusiness Corporation

Corporate Level

Strategic Business Unit 1

Strategic Business Unit 2

Strategic Business Unit 3

Business Level

Research and Development

Manufacturing

Marketing

Human Resources

Finance

Functional Level

Fig. 9 Levels of Organizational Strategy THE CORPORATE-LEVEL STRATEGY Employed by an organization involved in more than one type of business Seeks to answer: What business or businesses should we be in? Determines the roles that each business unit in the organization will play Example: PepsiCo used to have a restaurant division that included Taco Bell, Pizza Hut, and KFC, but, because of intense competitive pressures in the restaurant industry, it changed its corporate-level strategy and sold off that division to concentrate on its soda and snack food divisions. PepsiCos top managements corporate-level strategy integrates the strategies of its Pepsi, 7-Up International, and Frito-Lay divisions.

The most popular approach for describing an organizations corporate-level strategies is the Grand Strategies Framework.

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Valuable Strengths

Corporate Growth Strategies

Corporate Stability Strategies

Firm Status

The Grand Strategies in relation to the SWOT Analysis

Corporate Stability Strategies Corporate Retrenchment Strategies

Critical Weaknesses

Environmental Status Abundant Environmental Opportunities Critical Environmental Threats

Fig. 10 The Grand Strategies and SWOT Analysis Grand Strategy Stability A corporate-level strategy characterized by an absence of significant change. Examples include continuing to serve the same clients by offering the same product or service, maintaining market share, and sustaining the organizations return-on-investment results. This strategy should be applied when managers view the organizations performance as satisfactory and the environment appears to be stable and unchanging. Downfall: complacency, reluctance to venture or move into other areas. Grand Strategy Growth A corporate-level strategy that seeks to increase the level of the organizations operations Includes increasing popular quantitative measures such as sales revenues, number of employees, and market share. Can be achieved through direct expansion, vertical integration, horizontal integration, or diversification. o Growth through direct expansion is achieved by internally increasing a firms sales, production capacity, or workforce. No other firms are acquired or merged with; instead the company chooses to grow by itself through its own business operations. (i.e., Jollibee and McDonalds) o Vertical integration is an attempt to gain control inputs (backward vertical integration), outputs (forward vertical integration), or both. In backward vertical integration, the organization attempts to gain control of its inputs by becoming its own supplier. In forward vertical integration, the organization gains control of its outputs (products or services) by becoming its own distributor. o In horizontal integration, a company grows by combining with other organizations in the same industry (combining operations with competitors). Because combining with

13 competitors might decrease the amount of competition in an industry, some countries put restrictions for any proposed horizontal integration strategy. An organization can grow through diversification, either related or unrelated. Related diversification is when a company grows by merging with or acquiring firms in different but related industries. Unrelated diversification is when a company grows by merging or acquiring firms in different and unrelated industries.

Grand Strategy Retrenchment A corporate-level strategy designed to address organizational weaknesses that are leading to performance declines. When an organization is facing performance problems, a retrenchment strategy helps it stabilize operations, revitalize organizational resources and capabilities, and prepare to compete once again. Corporate Portfolio Analysis useful for managing organizations involved in multiple businesses. The BCG Matrix. The Boston Consulting Group introduced the idea that an organizations businesses could be evaluated and plotted using a 2 x 2 matrix to identify which ones offered high potential and which were a drain on organizational resources.
High Market Share High Low

Stars
Anticipated Growth Rate

Question Marks

Cash Cows

Dogs

Low

Fig. 11 The BCG Matrix o o Cash cows (low growth, high market share). Businesses in this category generate large amounts of cash, but their prospects for future growth are limited. Stars (high growth, high market share). These businesses are in a fast-growing market and hold a dominant share of that market. Their contribution to cash flow depends on their need for resources. Question marks (high growth, low market share). These businesses are in an attractive industry but hold a small market share percentage

14 Dogs (low growth, low market share). Businesses in this category do not produce or consume much cash. They have a low market share in a low-growth industry. o Strategic implications of the BCG Matrix: Managers should milk cash cows for as much as they can, limit any new investment in them, and use the large amounts of cash generated to invest in stars and question marks with strong potential to improve market share. Heavy investment in stars will help take advantage of the markets growth and help maintain high market share. The stars will eventually develop into cash cows as their markets mature and sales growth slows. The hardest decision for managers is related to the question marks. After close and careful analysis, some will be sold off and others turned into stars. The dogs should be sold off or liquidated as they have low market share in markets with low growth potential. A corporate portfolio matrix, such as the BCG matrix, can be a useful strategic management tool. It provides a framework for understanding diverse businesses and helps managers establish priorities for making resource allocation decisions. THE BUSINESS-LEVEL STRATEGY Seeks to answer: How should we compete in each of our businesses? Overlaps with corporate strategy for small organizations and large organizations that have not diversified into different products or markets For diversified firms: each division will have its own strategy that defines the products or services it will offer, the target customers, and effective promotions. The Strategic Business Unit (SBU) When an organization is in several different businesses, these single businesses that are independent and that formulate their own strategies are called strategic business units. SBUs are distinguished from other businesses of the parent company on the basis of the following principles o The organization is managed as a portfolio (group) of businesses; each business unit serves a clearly defined product-market segment with a clearly defined strategy. o Each business unit in the portfolio develops a strategy tailored to its capabilities and competitive needs but consistent with the overall organizations capabilities and needs o The total portfolio is managed to serve the interests of the organization as a whole; to achieve balanced growth in sales, earnings, and asset mix at an acceptable and controlled level of risk. Example: The French company LVMH-Moet Hennessy Louis Vuitton has different business-level strategies for its Christian Dior couture division, Louis Vuitton leather goods division, Guerlain perfume division, Fred Joailler jewels division, Hennessy cognac division, and its other luxury products division. Each has developed its own unique approach for distinguishing itself from its competitors. o

15 Competitive Strategies From Michael Porter. His competitive strategies framework identifies three generic strategies from which managers can choose. Porter proposes that some industries are inherently more profitable than others. But a company can still make a lot of money in a dull industry and lose money in a glamorous industry. The key is to exploit a competitive advantage. An important element in sustaining competitive advantage is doing an industry analysis. In any industry, five competitive forces dictate the rules of competition. Together, these five forces determine industry attractiveness and profitability. Managers assess an industrys attractiveness using the following five factors. o Threat of new entrants. Factors such as economies of scale, brand loyalty, and capital requirements determine how easy or hard it is for new competitors to enter an industry. o Threat of substitutes. Factors such as switching costs and buyer loyalty determine the degree to which customers are likely to buy a substitute product. o Bargaining power of buyers. Factors such as number of customers in the market, customer information, and the availability of substitutes determine the amount of influence that buyers have in an industry. o Bargaining power of suppliers. Factors such as the degree of supplier concentration and availability of substitute inputs determine the amount of power that suppliers have over firms in the industry. o Existing rivalry. Factors such as industry growth rate, increasing or falling demand, and product differences determine how intense the competitive rivalry will be among existing firms in the industry. After assessing the five forces and determining existing threats and opportunities, managers are now ready to select an appropriate strategy. Managers must select a strategy that will give the organization a competitive advantage. Competitive advantage comes from either having lower costs than all other industry competitors or by being significantly different from competitors. Choosing a strategy will depend on the organizations strengths and core competencies and its competitors weaknesses. Generic Strategy Overall cost leadership Commonly Required Skills and Resources Sustained capital investment and access to capital Process engineering skills Intense supervision of labor Products designed for ease in manufacture Low-cost distribution system Strong marketing abilities Product engineering Creative flair Common Organizational Requirements Tight cost control Frequent, detailed control reports Structured organization and responsibilities Incentives based on meeting strict quantitative targets Strong coordination among functions in R&D, product development, and marketing

Differentiation

16 Strong capability in basic research Corporate reputation for quality or technological leadership Long tradition in the industry or unique combination of skills drawn from other businesses Strong cooperation from channels Combination of the foregoing policies directed at the particular strategic target Subjective measurement and incentives instead of quantitative measures Amenities to attract highly skilled labor, scientists, or creative people.

Focus

Combination of the foregoing policies directed at the particular strategic target Fig. 12 Types of Competitive Strategies

When an organization sets out to be the lowest-cost producer in its industry, its following a cost leadership strategy. A low-cost leader aggressively searches out efficiencies in production, marketing, and other areas of operation. Overhead is kept to a minimum, and the firm does everything it can to cut costs. Although low-cost leaders dont place a lot of emphasis on frills, the product or service being sold must be perceived as comparable in quality to that offered by rivals or at least be acceptable to buyers. The company that seeks to offer unique products that are widely valued by customers is following a differentiation strategy. Sources of differentiation might be exceptionally high quality, extraordinary service, innovative design, technological capability, or an unusually positive brand image. The key is that whatever product or service attribute is chosen for differentiating must set the firm apart from its competitors and be significant enough to justify a price premium that exceeds the cost of differentiating. The focus strategy aims at a cost advantage or a differentiation (cost focus and differentiation focus, respectively) in a narrow segment. Managers select a market segment or group of segments in an industry and dont attempt to serve the broad market. The goal of a focus strategy is to exploit a narrow segment of a market. These segments can be based on product variety, type of end buyer, distribution channel, or geographical location of buyers. Research suggests that the focus strategy may be the most effective choice for small businesses because they typically do not have the economies of scale or internal resources to successfully pursue one of the other two strategies.

17 THE FUNCTIONAL-LEVEL STRATEGY Seeks to answer: How do we support the business-level strategy? Strategies created to support the business-level strategy directly affect traditional functional departments such as manufacturing, marketing, human resources, R&D, and finance. Example: R.R. Donnelley and Sons Company, a Chicago-based printer, made a business-level strategy decision to invest in high-tech digital printing methods. Its marketing department had dto develop new sales plans and promotional pieces, the production department had to incorporate the digital equipment in the printing plants, and the human resources department had to update its employee selection and training programs.

Activity: Doing a personal SWOT Analysis Objective: Make a SWOT Analysis that will serve as a guide in achieving personal goals. Tasks: 1. Start by writing your goal. 2. Look at how things are at present: a. What are your strengths? These are the things that you do well in. b. What are your weaknesses? These are the things that you have difficulty in. 3. Look at the things that may have an impact on you in the future: a. What opportunities are likely to arise? These are things that may have a positive impact on you. b. What threats may you encounter? These are the things that may have a negative impact on you. 4. Based on your SWOT Analysis, how will you be able to achieve your goal?

References: Robbins, S.P., Coulter, M. (2002). Management. 7th Ed. New Jersey: Prentice-Hall Inc. Hitt, M.A., Ireland, R.D., Hoskisson, R.E. (1999). Strategic Management: Competitiveness and Globalization. 3rd Ed. Ohio: South-Western College Publishing. Elsevier Butterworth-Heinemann. (2005). Management Extra: Managing Yourself. Massachusetts: Elsevier Ltd.