Business Policy and Strategy

A companys strategy is the game plan management is using to stake out a market position, conduct its operations, attract and please customers, compete successfully, and achieve organizational objectives. A strategy entails managerial choices among alternatives and signals organizational commitment to specific markets, competitive approaches, and ways of operating.

Business Policy and Strategy

Crafting, implementing, and executing a strategy are top-priority managerial tasks for two very big reasons. First, there is a compelling need for managers to proactively shape how the companys business will be conducted. Without a strategy, managers have no prescription for doing business, no road map to competitive advantage, no game plan for pleasing customers or achieving good performance. Second, there is an equally compelling need to mould the efforts and decisions of different divisions, departments, managers, and groups into a coordinated, compatible whole.

The Five Tasks of Strategic Management

The strategy implementing process consists of five interrelated managerial tasks: 1. Forming a strategic vision of where the organization is headed- so as to provide long-term direction, delineate what kind of enterprise the company is trying to become and infuse the organization with a sense of purposeful action. 2. Setting objectives-converting the strategic vision into specific performance outcomes for the company to achieve. 3. Crafting a strategy to achieve the desired outcomes 4. Implementing and executing the chosen strategy efficiently and effectively 5. Evaluating performance and initiating corrective adjustments in vision, long-term direction, objectives, strategy, or execution in light of actual experience, changing conditions, new ideas, and new opportunities

Developing A Strategic Vision

A strategic vision reflects managements aspirations for the organization and its business, providing a panoramic view of where we are going and giving specifics about its future business plans. A strategic vision points an organization in a particular direction and charts a strategic path for it to follow.

Setting Objectives
The purpose of setting objectives is to convert managerial statements of strategic vision and business mission into specific performance targetsresults and outcomes the organization wants to achieve. Objective setting is required of all managers. Every unit in a company needs concrete, measurable performance targets that contribute meaningfully toward achieving company objective. Two very distinct type of performance yardsticks are required: financial performance and strategic performance.

Setting Objectives
Financial Performance: Without adequate profitability, a companys pursuit of its vision, as well as its long-term health and ultimate survival, is jeopardized. Strategic Performance: Managers must also pay attention to the companys strategic wellbeing-its competitiveness and overall long-term business position. For achieving both performance company needs financial objectives and strategic objectives.

Financial and Strategic Objectives

Financial Objectives: Financial objectives concern the financial results and outcomes that management wants the organization to achieve. Example: ROI Strategic Objectives : Strategic objectives aim at results that reflect increased competitiveness and a stronger business position-outcomes such as winning additional market share, overtaking key competitors on product quality or customer service or product innovation, achieving lower overall costs than rivals, boosting the companys reputation with customers, winning a stronger foothold in international markets, exercising technological leadership, gaining a sustainable competitive advantage and capturing attractive growth opportunities.

Crafting a Strategy
Strategy making brings into play the critical managerial issue of how to achieve the targeted results in light of the organizations situation and prospects. Objectives are the ends and strategy is the means of achieving them. The hows of a companys strategy are typically a blend of : i) Deliberate and purposeful actions ii) As-needed reactions to unanticipated developments and fresh market conditions and competitive pressures, iii) The collective learning of the organization over time

Crafting a Strategy
What does a companys strategy consists of? Company strategies concern how; how to grow the business, how to satisfy customers, how to out compete rivals, how to respond to changing market conditions, how to manage each functional piece of the business and develop needed organizational capabilities, how to achieve strategic and financial objectives

Implementing and Executing the Strategy

The managerial task of implementing and executing the chosen strategy entails assessing what it will take to develop the needed organizational capabilities and to reach the targeted objectives on schedule. The managerial skill here is figuring out what must be done to put the strategy in place, carry it out proficiently, and produce good results. The implementing process includes: Building a capable organization Allocating resources Establishing strategy-supportive policies Motivating people Reward the performance achieved Creating a culture conducive to successful strategy implementation and execution Installing ICTs Installing best practices/benchmarking Exerting the internal leadership needed to drive implementation forward

i) ii) iii) iv) v) vi) vii) viii) ix)

Evaluating Performance, Monitoring New Developments, and Initiating Corrective Adjustments

It is always incumbent on management to evaluate the organizations performance and progress. It is managements duty to stay on top of the companys situation, deciding whether things are going well internally, and monitoring outside developments closely. Revising budgets, changing policies, reorganizing, making personnel changes, building new competencies and capabilities, revamping activities and work processes, making efforts to change the culture, and revising compensation practices are typical managerial actions that may have to be taken to hasten implementation or improve strategy execution.

The Benefits of a Strategic Approach to Managing

Providing better guidance to the entire organization on the crucial point of what it is we are trying to do Making managers and organizational members more alert to new opportunities and threatening developments Helping to unify the organization Creating a more proactive management posture Promoting the development of a constantly evolving business model that will produce sustained bottom-line success for the enterprise Providing managers with a rationale for evaluating competing budget requests-a rationale that argues strong for steering resources into strategy-supportive, results-producing areas.

Three Levels of Strategy

The decision-making hierarchy of a firm typically contains three levels. 1. Corporate Level Strategy: at the top of this hierarchy, composed principally of a board of directors, CEO, and administrative officer. Responsibilities: i) achievement of financial and non-financial goals, ii) enhancing the firms image iii) fulfilling its social responsibilities iv) the concerns of stockholders and society at large v) set objectives and strategies vi) exploits firms distinctive competencies by adopting a portfolio approach

Levels of Strategy
2. Business Level Strategy: In the middle of the decision-making hierarchy is the business level strategy, composed principally of business and corporate managers. Responsibilities: These managers must translate the statements of direction and intent generated at the corporate level into concrete objectives and strategies for individual business divisions or SBUs. They also determine how the firm will compete in the selected product-market arena. They strive to identify and secure the most promising market segment within that arena.

Levels of Strategy
Functional Level Strategy: At the bottom of the decision-making hierarchy is the functional level strategy, composed principally of managers of product, geographic, and functional areas. Responsibilities: They develop annual objectives and short-term strategies in such as production, operations, research and develop, finance and accounting, marketing, and human relations. Their key responsibilities is to implement or execute the firms strategic plan by ensuring effectiveness and efficiency in production and marketing system.

Alternative Strategies Management Structure

Corporate/ Business Level

R&D Strategies

Financial/accounting Strategies

Marketing Strategies

Alternative Strategies Management Structure

Corporate Strategies

Business 1

Business 2

Business 3

R&D

Financial/Accounting Strategies

Marketing Strategies

Human Relations Strategies

Benefits of Strategic Management

Strategy formulation activities enhance the firms ability to prevent problems Group-based strategic decisions are likely to be drawn from the best available alternatives. The involvement of employees in strategy formulation improves their understanding of the productivityreward relationship in every strategic plan and thus, heightens their motivation. Gaps and overlaps in activities among individuals and groups are reduced as participation in strategy formulation clarifies differences in roles.

Components of the Strategic Management Model

Company Mission: The mission of a company is the unique purpose that sets it apart from other companies of its type and identifies the scope of its operations. The mission describes the companys product, market and technological areas of emphasis in a way that reflects the values and priorities of the strategic decision makers.

Components of the Strategic Management Model

Social Responsibility: Social responsibility is a critical consideration for a companys strategic decision makers since the mission statement must express how the company intends to contribute to the societies that sustain it. A firm needs to set social responsibility aspirations for itself, just as it does in other areas of corporate performance.

Components of the Strategic Management Model

Internal Analysis: The company analyzes the quantity and quality of the companys financial, human, and physical resources. It also assesses the strengths and weaknesses of the companys management and organizational structure. External Environment: A firms external environment consists o f all the conditions and forces that affect its strategic options and define its competitive situation.

Components of the Strategic Management Model

Strategic Analysis and Choice: It identifies strategies that are most effective at building sustainable competitive advantage based on key value chain activities and capabilities-core competencies of the firm. Long Term Objectives: The results that an organization seeks over a multiyear period are its long-term objectives. Such objectives typically involve some or all of the following areas: profitability, return on investment, competitive position, technological leadership, productivity, employee relations, public responsibility and employee development.

Components of the Strategic Management Model

Generic and Grand Strategies: Many businesses explicitly and all implicitly adopt one or more generic strategies in the market place such as low cost, differentiation, or focus strategies. Grand strategies show how the long-term objectives are achieved. Action Plans and Short-Term Objectives: Action plans translate generic and grand strategies into action by incorporating four elements such as tactics and actions, clear time frame for competition, accountability, immediate objectives that identifies outcomes.

Components of the Strategic Management Model

Functional Tactics: Functional tactics are detailed statements of the means or activities that will be used to achieve short-term objectives and establish competitive advantage. Policies That Empower Action: Policies are broad, precedent-setting decisions that guide or substitute for repetitive or time-sensitive managerial decision making. Policies often increase managerial effectiveness by standardizing routine decisions and empowering or expanding the discretion of managers and subordinates in implementing business strategies.

Components of the Strategic Management Model

Restructuring, Reengineering and Refocusing the Organization: All these are terms that reflect the critical stage in strategy implementation wherein managers attempt to recast their organization through providing better leadership, culture and reward system. Strategic Control and Continuous Improvement: Strategic control is concerned with tracking a strategy as it is being implemented, detecting problems or changes in its underlying premises, and making necessary adjustments. Continuous improvement provides a way for managers to provide a form of strategic control that allows their organization to respond more proactively and timely to rapid developments in hundreds of areas that influence a business success.

What is a Company Mission?

A companys mission must determine the basic goals and philosophies that will shape its strategic posture. This includes the following points: i) the business philosophy of the firms strategic decision makers ii) the image the firm seeks to achieve iii) the firms self-concept iv) the firms principal product or service V) the primary customer needs that the firm will attempt to satisfy For example see exhibit 2-1 from page 27 of the provided book.

What is a Company Mission?

The Need for an Explicit Mission: A companys mission contains broadly outlined or implied objectives and strategies rather than specific directives. It is a statement, not of measurable targets but of attitude, outlook, and orientation. The mission statement should addresses the following questions for clarification: i) why is this firm in business? ii) what are our economic goals? iii) what is our operating philosophy in terms of quality, image, and self-concept? iv) what are our core competencies and competitive advantage? V) what customers do and can we serve? Vi) how do we view our responsibilities to stockholders, employees, communities environment, social and competitors?

Basic Product or Service; Primary Market; Principle Technology

Three indispensable components of the mission statement are specification of the basic product or service, specification of the primary market, and specification of the principal technology for production or delivery. For example see exhibit 2-2, from page 28 of the provided book.

Company Goals: Survival, Growth, Profitability

Three economic goals guide the strategic direction of almost every business organization. Survival Goal: a firm that is unable to survive will be incapable of satisfying the aims of any of its stakeholders. Unfortunately, the goal of survival is neglected as a principal criterion in strategic decision making. Profitability Goal: profitability is the mainstay goal of a business organization. No matter how profit is measured or defined, profit over the long term is the clearest indication of a firms ability to satisfy the principal claims and desires of employees and stock holders.

Company Goals: Survival, Growth, Profitability

Growth Goal: a firms growth is tied inextricably to its survival and profitability. Some studies have show that growth in market share is correlated with profitability. Other important forms of growth are- no. of market served, variety of products offered, technologies that are used to provide goods and services etc. Growth means change and proactive change is essential in a dynamic business environment.

Assessing the Internal Environment of the Firm

Value-Chain Analysis: Value-chain analysis views the organization as a sequential process of value-creating activities. The approach is useful for understanding the building blocks of competitive advantage. In competitive terms, value is the amount that buyers are willing to pay for what a firm provides them. Value is measured by total revenue, which we get by price multiplied by quantity of a product. A firm is profitable to the extent that the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production is a key concept used in analyzing a firms competitive position.

The External Environment

A number of external factors influence a firms choice of direction and action and, ultimately, organizational structure and internal process. These factors divided into three categories: 1. Remote Environment: economic, social, political technological, ecological. 2. Industry Environment: entry barriers, supplier power, buyer power, substitute availability, competitive rivalry 3. Operating Environment: competitors, creditors, customers, labours, suppliers.

International Environment
The following economic, political, legal and social factors used to assess international environments: Economic Environment: i) level of economic development ii) population iii) gross national product iv) per capita income v) literacy level vi) social infrastructure vii) natural resources viii) climate ix) membership in regional economic blocks (EU, NAFTA, SAFTA, ASEAN) x) monetary and fiscal policies xi) wage and salary levels xii) nature of competition xiii) currency convertibility xiv) inflation xv) taxation system xvi) interest rates.

International Environment
Legal Environment: i) legal tradition ii) effectiveness of legal system iii) treaties with foreign nations iv) patent trademark laws v) laws affecting business firms. Political System: i) form of government ii) political ideology iii) stability of government iv) strength of opposition parties and groups v) social unrest vi) political strife and insurgency vii) governmental attitude towards foreign firms viii) foreign policy

International Environment
Cultural Environment: i) customs, norms, values, beliefs ii) language iii) attitudes iv) motivations v) social institutions vi) status symbols vii) religious beliefs

Remote Environment
The remote environment comprises factors that originate beyond, and usually irrespective of, any single firms operating situation. That environment presents firms with opportunities, threats, and constraints. A single firm cant influence the external environment. Economic Factors: Economic factors concern the nature and direction of the economy in which a firm operates. Because consumption patterns are affected by the relative affluence of various market segments, each firm must consider economic trends in the segments that affect its industry.

Economic Factors
The following economic factors are important for a firm: i) availability of credit ii) the level of disposable income iii) the propensity of people to spend, iv) interest rates v) inflation rates vi) trends in the growth of GNP and GDP

Social Factors
The social factors deal with the attitudes of the people of a society. These includes; beliefs, attitudes, opinions, lifestyles, culture, demographic, religious educational and ethnic conditions. As social attitudes change, so too does the demand for various types of clothing, books, leisure activities and so on. These social factors are dynamic, with constant change resulting from the efforts of individual to satisfy their desires and needs by controlling and adapting to environmental factors.

Social Factors
Some Social Changes and their Impacts: Entry of large number of women into the labour market. Quality of life Issues The shift in the age distribution of the population

Political Factors
The direction and stability of political factors are a major consideration for managers on formulating company strategy. Political factors define the legal and regulatory parameters within which firms must operate. The political issues which are important to notice are; i) fair-trade decisions, ii) antitrust laws iii) tax programs vi) minimum wage legislation vii) pollution and pricing policies etc. viii) patent laws ix) government subsidies X) product research grand

Technological Factors
To avoid obsolescence and promote innovation, a firm must be aware of technological changes that might influence its industry. Creative technology give us i) new products ii) improvement of existing products iii) improvement of manufacturing and marketing techniques. Firms must understand the technological forecasting Technological forecasting means understanding both the existing technologies and advances of future technologies which affect firms products and services.

Technological Factors
The technological impacts should be considered in three areas; i) impacts on remote environment ii) on competitive business situation iii) on business-society interface which includes quality of life factors such as ecology and public safety.

Ecological Factors
The term ecology refers to the relationships among human beings and other living things and the air, soil, and water that support them. Specific concerns include i) global warming ii) loss of habitat iii) biodiversity iv) air, water and land pollution As a major contributor to ecological pollution, business now is being held responsible for eliminating the toxic by products of its current manufacturing processes and for cleaning up the environmental damage that it did previously.

Ecological Factors
Pollution can be reduced by; i) reformulating products ii) modifying processes iii) redesigning production equipment iv) recycling by-products Examples; PHP steel is now producing lead free tin, automobile industries install expensive emission control technologies, gasoline industry has been forced to formulate new low-lead and no-lead products, R& D attracts huge funds for ecological superior products.

Benefits to Eco-Efficiency
The reasons for implementing the environmental policy cited by Stephen Schmidheiny (Chairman of the Business Council for Sustainable Development) are; i) customers demand for cleaner products ii) environmental regulations are increasingly more stringent (sever), iii) employees prefer to work for environmentally conscious firms iv) financing is more readily available for eco-efficient firms V) government provides incentives for environmentally responsible companies

Analyzing the External Environment of the Firm

Strategies are not and should not be developed in a vacuum. They should be responsive to the external business environment. To avoid strategic mistakes, firms must become knowledgeable about the business environment. One tool for analyzing trends is forecasting. In the development of forecasts, environmental scanning and environmental monitoring are important in detecting key trends and events. Managers also must aggressively collect and disseminate competitor intelligence. The information gleaned from these three activities is invaluable in developing forecasts and scenarios to minimize present and future threats as well as to exploit opportunities.

Creating the Environmentally Aware Organization

So how do managers become environmentally aware? There are three important processes for thati) Scanning ii) Monitoring iii) Gathering competitive intelligence
Environmental scanning

Creating the Environmentally Aware Organization

Inputs of Forecasting:
Environmental Scanning

Environmental Monitoring

Forecast

Competitive Intelligence

The Role of Scanning, Monitoring, Competitive Intelligence, and Forecasting

Environmental Scanning: Environmental scanning involves surveillance of a firms external environment to predict environmental changes and detect changes already underway. Successful environmental scanning alerts the organization to critical trends and events before the changes have developed a discernible pattern and before competitors recognize them. Example: Petroleum company BP recognized the growing demand of oil and natural gas 30 billion more cubic feet everyday.

Environmental Monitoring
Environmental monitoring tracks the evolution of environmental trends, sequences of events, or streams of activities. While environmental scanning may make you aware of the trends, they require close monitoring, which involves closer ongoing scrutiny. For example, you should monitor sales in Asia, central and eastern Europe and Latin America.

Competitive Intelligence
Competitive Intelligence (CI) helps firms define and understand their industry and identify rivals strengths and weaknesses. This includes the intelligence gathering associated with collecting data on competitors and interpreting such data. Done properly, competitive intelligence helps a company avoid surprises by anticipating competitors moves and decreasing response time. For example, banks continually track home loan, auto loan, and certificate of deposit (CD) interest rates charged by peers in a given geographic region.

Environmental Forecasting
Environmental forecasting involves the development of plausible projections about the direction, scope, speed, and intensity of environmental change. Its purpose is to predict change It asks: How long will it take a new technology to reach the market place? Are current life style trends likely to continue? Etc.

SWOT Analysis
To understand the business environment of a particular firm, you need to analyze both the general environment and the firms industry and competitive environment, One of the most basic techniques for analyzing firm and industry conditions is SWOT analysis. It provides raw material- a basic listing of conditions both inside and surrounding your company. The strengths and weaknesses portion of SWOT refers to the internal conditions of the firm- where your firm excels (strengths) and where it may be lacking relative to competitors (weaknesses).

SWOT Analysis
Opportunities and threats are environment conditions external to the firm. These could be factors either in the general environment or in the competitive environment. The general idea of SWOT analysis is that a firms strategy must: i) Build on its strengths ii) Try to remedy the weaknesses or work around them iii) Take advantage of the opportunities presented by the environment and, iv) Protect the firm from the threats.

How Competitive Forces Shape Strategy

The essence of strategy formulation is coping with competition. Competition in an industry is rooted in its underlying economics. Customers, suppliers, potential entrants, and substitute products are all competitors that may more or less prominent or active depending on the industry. The state of competition in an industry depend on five basic forces ; entry barriers, determinants of supplier power, determinants of substitution threat, determinants of buyer power, rivalry determinants.

Entry Barriers
Economies of scale Proprietary product differences Brand identity Switching costs Capital requirements Access to distribution Absolute cost advantages Proprietary curve Access to necessary inputs Proprietary low-cost product design Government policy Expected retaliation

Determinants of Supplier Power

Differentiation of inputs Switching costs of suppliers and firms in the industry Presence of substitute inputs Suppliers concentration Importance of volume to supplier Cost relative to total purchases in the industry Impact of inputs on cost or differentiation Threats of forward integration relative to threat of backward integration by firms in the industry

Determinants of Substitute Threat

Relative price Performance of substitutes Switching costs Buyer propensity to substitute

Determinants of Buyer power

Bargaining Leverage: Buyer concentration Vs firm concentration Buyer volume Buyers switching costs relative to firm switching costs Buyer information Ability to backward integrate Substitute products Pull-through

Determinants of Buyer Power

Price Sensitivity: Price/total purchases Product differences Brand identity Impact on quality/performance Buyer profits Decision makers incentives

Rivalry Determinants
Industry growth Fixed or storage costs/value added Intermittent overcapacity Product differences Brand identity Switching costs Concentration and balance Informational complexity Diversity of competitors Corporate stakes Exit barriers