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Strategic Management CBU

4107

MR J. RANGANAI
EMAIL: ranganaij@gmail.com
0772 122 120 /0733 236 657/0713 421 422
DEFINING STRATEGY

Strategy refers to top management’s plans to develop and sustain


competitive advantage

Strategy is a unified comprehensive and integrated plan designed


to ensure that the corporate objectives of the enterprise are
achieved.

*Deliberately choosing a different set of activities to deliver


a unique mix of value (Porter 1996)

*The direction and scope of an organization over the


long term, which achieves advantage in a changing
environment through its configuration of resources
and competencies with the aim of fulfilling
shareholder expectations. (Johnson et al 2006)
Defining Strategy: Mintzberg `s five
perspectives of strategy
*Further ,pursuant to defining strategy, it is Mintzberg
et al (2009) who came up with the most holistic
definition of strategy which is fivefold, that is defines
strategy from five perspectives as follows:
(i) Strategy as a plan: from this perspective, strategy is a
plan, or something equivalent – a direction, a guide or
course of action into the future, a path to get here from
there.
(ii) Strategy as a pattern: Here ,according to Mintzberg
et al (2009), strategy is seen as the aggregate of behaviour
that can be consistently observed in an organisation over
time
Defining Strategy: Mintzberg `s five fold
definition

(iii) Strategy as perspective: Here strategy is seen as


the organisation`s fundamental way of doing doings
(Mintzberg et al 2009),as a theory of business
(Drucker;1994) or the personality of the organisation
(Barman and Petersson ;2002,Mintzberg and
Quinn;1996).
(iv) Strategy as a position: Strategy reflects the locating
of particular products in a particular market (Mintzberg
et al 2009
(v) Strategy as a ploy: Here Mintzberg et al (2009)
highlight strategy as a specific manoeuvre intended to
outwit a competitor
CLASSIFICATION OF STRATEGY
*Many typologies can emerge from the concept of strategy when
it is seen from different perspectives. Pursuant to that, a
review of literature on strategy shows that many typologies
exist. Thus strategy can be classified on the following basis;
a) On a generic basis
b) According to levels in an organisation
c) According to Stages of operation
d) On the basis of corporate direction
e) Based on the match between product and market
focus
f) According to the intensity of competition
g) On the basis of intention vs. realization
(i) Classification of strategy on a generic basis

*One of the most popular typologies of strategy, based


on Porter (1985) `s generic strategies, the typology
delineates strategy into three classes, that is;
 Overall Cost Leadership Strategy
 Differentiation Strategy
 Focus Strategy
(ii) Classification according to levels in an
organisation
*One of the most popular classifications of strategy is according to levels
in an organisation as follows:
Global level strategies are pursued by organizations while they
expand their operations in international business so as to
increase their profitability
-corporate level strategy: concerned with the overall scope of an
organisation and how value will be added to the different
parts(business units) of the org.
- business level strategy: according to Johnson et al (2006) can
be conceptualised in terms of how to compete successfully in
particular markets.
-operational strategy: concerned with how the component parts
of an organisation deliver the corporate and business level
strategies in terms of resources ,processes and people
Classification according to stages of
operation
 Upstream Business Strategy: associated with
businesses that function close to raw materials, with
the flow of the product tending to be divergent, from
a basic material to a variety of uses for it .
 Midstream Business Strategy: org draws a
variety of inputs into a single production process out
of which flows the product to a variety of users
 Downstream Business Strategy: Here a wide
variety of inputs converge into a narrow funnel, as in
many products sold by a department store
Classification on the basis of
corporate direction
*Here strategy is viewed from a corporate directional perspective
such that four sub-types of strategy emerge:
 Growth Strategy: expansion driven by increased market
penetration, horizontal integration, vertical integration or
diversification.
 Stability Strategy: implemented on a steady as it goes
approach in order to consolidate or maintain a firm`s competitive
position
 Retrenchment Strategy: based on reduction in
product/service lines, markets or functions
 Combination Strategy: a multi-strategy approach whereby
there is justification for pursuing one strategy in some Strategic
Business Units and another in the others
Classification on the basis of the match
between product & market focus

*Through matching product development and market


position, four alternative growth strategies based on
the Ansoff matrix as follows:
 market penetration,
 market development,
 product development and
 diversification
Classification on the basis of intention vs
realization
* Henry Mintzberg introduced two terms to help clarify the
shift that often occurs between the time a strategy is
formulated and the time it is implemented.
An intended strategy (i.e., what management originally
planned) may be realized just as it was planned, in a
modified form, or even in an entirely different form
Occasionally, the strategy that management intends is
actually realized, but the intended strategy and the
realized strategy—what management actually
implements—usually differ
Classification on the basis of intensity of
competition

*By looking at strategy on the basis of intensity of


competition, Red Ocean Strategy and Blue Ocean
Strategy emerge as the strategy sub-types.
(i) Red Ocean Strategy: focuses on head on rivalry with
competitors in existing markets, such that competitive rivalry
creates intense competition that is analogous to bloody shark-
infested waters.
(ii) Blue Ocean Strategy, as conceptualised by Kim and Mauborgne
(2005) is a strategic framework whereby a business focuses on
creating new demand, directing its strategic compass on
uncontested market space, making competition irrelevant thus
realising disproportionately high growth and profitability.
Factors that Shape a Company’s Strategy

External factors
 PESTLE I considerations
 Competitive conditions and overall industry
attractiveness ;- company’s strategy should be tailored
to meet the mix of competitive factors at play such as
price, product quality, service as well as industry changes
in industry structure, technology developments,
changing buyer needs and expectations etc.
 The company’s market opportunities and
threats ;- Strategy should involve crafting offensive
moves to capitalize on the most promising opportunities
and crafting defensive moves to protect the company’s
competitive position and long-term sustainability
Factors that shape a Company’s Strategy

Internal Factors
 Company resource strengths, competencies and
competitive capabilities;- strategy depends on availability
of resources, competencies and capabilities needed to execute
the strategy proficiently
 The personal ambitions, business philosophies and
ethical beliefs of managers ;- Strategy can be influenced
by a managers personal values, experiences and emotions
either deliberately or sub-consciously.
 Influence of shared values and company culture ;-
an organisation’s practices, traditions, philosophical beliefs
and way of doing things combine to create a distinctive
culture that will impact on strategy development.
Tests of a Winning Strategy

 The Goodness of Fit Test ;- a good strategy has to


match the industry and competitive conditions, market
opportunities, threats and other external environmental
aspects. Should also fit in with its company’s resource
strengths, weaknesses, competencies and competitive
capabilities.
 The competitive Advantage Test ;- A good strategy
leads to a sustainable competitive advantage.
 The Performance Test;- A good strategy should boost
company performance in profitability, the company’s
competitive strength and long term market position.
Concept of a business model

 A conceptual tool containing a set of objects,


concepts and their interrelationships with the
objective to express the business logic of the firm.
 How an organisation manages its incomes and costs
through structural arrangement of its activities.
*Weill et al (2005) who highlight business models as
better predictors of performance than industry
classifications, defined a business model as
consisting of two elements;
 What a business does
 How the business makes money doing things
Strategic Management

 The set of decisions and actions which lead to the


development of an effective strategy or strategies to help
achieve corporate objectives
 The set of managerial decisions and actions that determine
the long run performance of the organization.
 The process of continuously relating the organisational
objectives and resources to opportunities and threats in the
environment.
 Strategic management deals with decision making and
actions which determine an enterprise `s ability to excel
survive or die by making the best use of a firm's resources
in a dynamic environment
Strategy & Strategic Management

 Strategic management is a broader term than


strategy and is a process that includes top
management’s analysis of the environment in which
the organization operates prior to formulating a
strategy, as well as the plan for implementation and
control of the strategy.
 The difference between a strategy and the strategic
management process is that the latter includes
considering what must be done before a strategy is
formulated through assessing whether or not the
success of an implemented strategy was successful
Strategic Management Process

*The strategic management process can be summarized in five steps:


1. External Analysis: Analyze the opportunities and threats, or
constraints, that exist in the organization’s external environment,
including industry and forces in the external environment.
2. Internal Analysis: Analyze the organization’s strengths and
weaknesses in its internal environment. (SWOT Analysis /7s
framework)
3. Strategy Formulation: Formulate strategies that build and sustain
competitive advantage by matching the organization’s strengths and
weaknesses with the environment’s opportunities and threats.
4. Strategy Execution: Implement the strategies that have been
developed.
5. Strategic Control: Measure success and make corrections when the
strategies are not producing the desired outcome.
Scientific and Artistic Perspectives on
Strategic Management
* There are two different perspectives on the approach that top
executives should take to strategic management.
(ii) scientific perspective, whereby strategic managers are
encouraged to systematically assess the firm’s external
environment and evaluate the pros and cons of myriad
alternatives before formulating strategy.
 The business environment is seen as largely objective,
analyzable, and largely predictable.
 As such, strategic managers should follow a systematic
process of environmental, competitive, and internal analysis
and build the organization’s strategy on this foundation.
 Strategic managers should be trained, highly skilled analytical
thinkers capable of digesting a myriad of objective data and
translating it into a desired direction for the firm.
Scientific and Artistic Perspectives on Strategic
Management
 (ii) Artistic perspective on strategy: the lack of
environmental predictability and the fast pace of
change render elaborate strategy planning as suspect at
best.
 Instead, strategists should incorporate large doses of
creativity and intuition in order to design a
comprehensive strategy for the firm.
 The strategy artist senses the state of the organization,
interprets its subtleties, and seeks to mould its strategy
like a potter molds clay.
 The artist visualizes the outcomes associated with
various alternatives and ultimately charts a course
based on holistic thinking, intuition, and imagination
Theoretical Influences on Strategic Management

(i) Industrial organization (IO)


 A branch of microeconomics, emphasizes the influence of
the industry environment upon the firm.
 The central tenet of IO theory is the notion that a firm must
adapt to influences in its industry to survive and prosper;
thus, its financial performance is primarily determined by
the success of the industry in which it competes.
 Industries with favorable structures offer the greatest
opportunity for firm profitability.
 Following this perspective, it is more important for a firm
to choose the correct industry within which to compete
than to determine how to compete within a given industry.
Theoretical Influences on Strategic Management

(ii) Resource-based theory


 Views performance primarily as a function of a firm’s ability to utilize its
resources.
 Although environmental opportunities and threats are important, a
firm’s unique resources comprise the key variables that allow it to develop
a distinctive competence, enabling the firm to distinguish itself from its
rivals and create competitive advantage.
 Resources include all of a firm’s tangible and intangible assets, such as
capital, equipment, employees, knowledge, and information.
 An organization’s resources are directly linked to its capabilities, which
can create value and ultimately lead to profitability for the firm.
 Resource-based theory focuses primarily on individual firms rather than
on the competitive environment.
 If resources are to be used for sustained competitive advantage—a firm’s
ability to enjoy strategic benefits over an extended period of time—those
resources must be valuable, rare, not subject to perfect imitation, and
without strategically relevant substitutes
Theoretical Influences on Strategic Management

(iii) Contingency theory


 The most profitable firms develop beneficial fits with their
environments.
 In other words, a strategy is most likely to be successful when it is
consistent with the organization’s mission, its competitive
environment, and its resources.
 Contingency theory represents a middle ground perspective that
views organizational performance as the joint outcome of
environmental forces and the firm’s resources.
 Firms can become proactive by choosing to operate in
environments where opportunities and threats match the firms’
strengths and weaknesses.
 Should the industry environment change in a way that is
unfavorable to the firm, its top managers should consider leaving
that industry and reallocating its resources to other, more
favorable industries.
Benefits of Strategic Management

 Principal benefit of strategic management has been to help


organization formulate better strategies.
 Allows an organization to be more proactive than reactive
in shaping its own future i.e. it allows an organization to
initiate and influence the future
 Involvement in the process results in a high level of
commitment in the org.
 Creativity and innovativeness when employees understand
and support the firm’s mission, objectives, and strategies.
Benefits of Strategic Management

 Research indicates that organizations using


strategic-management concepts are relatively
profitable and successful.
 SM offers other tangible benefits, such as an
enhanced awareness of external threats & an
improved understanding of competitors’ strategies.
 SM results in empowerment of individuals in the org
 It allows for identification, prioritization, and
exploitation of opportunities.
Benefits of Strategic Management

 It allows major decisions to better support


established objectives.
 It allows more effective allocation of time and
resources to identified opportunities.
 It helps integrate the behavior of individuals into a
total effort.
 It encourages a favorable attitude toward change.
 It encourages forward thinking.
Why Some Firms do not formulate
strategies

a) Lack of knowledge or experience in strategic


planning
b) Firefighting— An organization can be so deeply
embroiled in resolving crisis and firefighting that it
reserves no time for planning.
c) Waste of time—Some firms see planning as a waste
of time because no marketable product is produced.
Time spent on planning is an investment.
d) Too expensive—Some organizations see planning as
too expensive in time and money.
e) Laziness—People may not want to put forth the effort
needed to formulate a plan.
Why Some Firms do not formulate
strategies

g) Content with success—Particularly if a firm is successful,


individuals may feel there is no need to plan because things are fine as
they stand. But success today does not guarantee success tomorrow.
h) Overconfidence—As managers amass experience, they may rely
less on formalized planning. Being overconfident or overestimating
experience can bring demise
i) Prior bad experience—People may have had a previous bad
experience with planning, that is, cases in which plans have been long,
cumbersome, impractical, or inflexible managers may not be
committed to planning.
j) Self-interest—When someone has achieved status, privilege, or self-
esteem through effectively using an old system, he or she often sees a
new plan as a threat.
k) Fear of the unknown—People may be uncertain of their abilities to
learn new skills, of their aptitude with new systems, or of their ability to
take on new roles.
Pitfalls in Strategic Planning

*Some pitfalls to watch for and avoid in strategic planning are


these:
 Using strategic planning to gain control over decisions and
resources
 Doing strategic planning only to satisfy accreditation or
regulatory requirements
 Too hastily moving from mission development to strategy
formulation
 Failing to communicate the plan to employees, who
continue working in the dark
 Top managers making many intuitive decisions that conflict
with the formal plan
Pitfalls in Strategic Planning

 Top managers not actively supporting the strategic-planning


process
 Failing to use plans as a standard for measuring
performance
 Delegating planning to a “planner” rather than involving all
managers
 Failing to involve key employees in all phases of planning
 Failing to create a collaborative climate supportive of change
 Viewing planning as unnecessary or unimportant
 Becoming so engrossed in current problems that insufficient
or no planning is done
 Being so formal in planning that flexibility and creativity are
stifled
Critique of Strategic Management

 Some charge that such models are too complex or


too simplistic
 Others emphasize that the stages in the process are
so closely interrelated and that considering them as
independent steps may be counterproductive.
 Still others, such as Mintzberg, argue that planning
models stifle the creativity and imagination that is
central to formulating an effective strategy
 Can be a waste of time if strategy is not implemented
 Can lead to constant changes that may alienate key
stakeholders.
Strategic Decisions

*It is also important to distinguish between strategic decisions and


common management decisions. In general, strategic decisions
are marked by four key distinctions:
(i) They are based on a systematic, comprehensive analysis of
internal attributes and factors external to the organization.
(ii) They are long-term and future-oriented but are built on
knowledge about the past and present.
(iii) They seek to capitalize on favorable situations outside the
organization and minimize on the effects of external threats as
well
(iv) They involve choices. Although making win-win strategic
decisions may be possible, most involve some degree of trade-off
between alternatives—at least in the short run.
Strategic Decisions: Role of Corporate
Players
(i) Board of Directors
 The Board of Directors normally approves all
decisions that affect long-term performance of the
Corporation
* The Board carries out three basic tasks for strategic
management.
a) Monitoring: Board should be aware of the
developments within and outside the organization
and bring it to the notice of the management.
Board of Directors

b) Evaluate: A Board should analyze the plans,


decisions and actions of management and highlight
the positive and negative side of the issues and
suggest alternatives.
c) Initiative and determination: delineate
corporate mission, specify strategic options, make
decisions
Role of Board of Directors: Theoretical
Perspectives
(i) Managerial Hegemony Theory: Boards are a legal
fiction dominated by management because of:
 Separation of ownership & control
 Information Asymmetry
 management`s reduced dependence on
shareholders for capital
Role of Board of Directors: Theoretical
Perspectives
(ii) Agency Theory
 Agency theory suggests that the firm can be viewed as a nexus
of contracts (loosely defined) between resource holders.
 Principals (shareholders) delegate work to the agents
(managers),an arrangement in which conflict of interest is
inevitable.
 Agency theory assumes that managers are likely to satisfice
rather than profit maximise on behalf of the principal.
 Agency theory argues that the major role of the board is to
reduce the potential divergence of interest between
shareholders & management, minimizing agency costs and
protecting shareholders` investments.
Agency Theory Problem

The agency problem occurs when:


 the desires or goals of the principal and agent conflict and
it is difficult or expensive for the principal to verify that
the agent has behaved inappropriately
Solution:
 principals engage in incentive-based performance
contracts
 monitoring mechanisms such as the board of directors
Role of Chief Executive

 Provides strategic leadership to the org


 Strategic decision making is generally reserved for
the top executive and members of his or her top
management team
 The CEO is the individual ultimately responsible
(and generally held responsible) for the
organization’s strategic management but he or she
rarely acts alone.
 There wont be effective strategic planning in an
organization in which chief executive does not give
firm support.
Role of Business Unit Heads & other
managers
 The CEO relies on a team of top-level executives &
business unit heads for strategic input
 Thus CEO generally involve the heads of functional
departments in strategic decisions
 The degree of involvement of top & middle managers
in the strategic mngt process also depends on the
personal philosophy of the CEO
 Input to strategic decisions, however, need not be
limited to members of the top mgnt team. To the
contrary, obtaining input from others throughout the
org,either directly or indirectly, can be beneficial.

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