STRATEGIC MANAGEMENT

SEMESTER III COMPULSORY PAPER CRDIT 3 45 HOURS

OBJECTIVE
This core course deals with the craft of strategy; that is, how to identify and choose a superior competitive position, how to analyse a strategic situation, and finally how to create the organisational context to make the chosen strategy work.

 Introduction to Corporate Strategy Strategy and the Quest for Competitive Advantage. Corporate Social Responsibility Enabling Drivers for Strategies Strategy and leadership 9. J David Hunger & Thomas L Wheelen, Essentials of Strategic Management, 3rd ed., Prentice Hall of India, 2002.

11. R Srinivasan, Strategic Management: The Indian Context, 2nd ed., Prentice Hall of India,

A PERSPECTIVE INTO STRATEGYEXAMPLE

GROWTH OF BANKING SECTOR IN INDIA PRE-NATIONALISATION NATIONATIONALISATION POST NATIONALISATION TILL 1991 OPENING UP OF BANKING SECTOR-NEW PRIVATE SECTOR BANKS IMPACT OF LIBERALISATION GOVT REGULATION DILUTED MULTIFOLD EXPANSION IN BANKING SERVICES.NONFUNDED FINANCIAL SERVICES COMPETITION..CUSTOMER SUPREME NEW PRODUCTS AND NEW SCENARIO

23. Philip Sadler, Strategic Management, 2nd ed., Kogan Page India, 2002. 24. Garth Saloner, Andrea Shepard, Joel Podolny, Strategic Management, John Wiley & Sons (Asia), 2001. 26. John A Pearce II, Richard B Robinson, Jr., Strategic Management: Strategy Formulation and Implementation, 5TH ed. AND LATTER EDITIONS, AITBS Publishers & Distributors, 2002. (Irwin publications-usa)

Introduction to Corporate Strategy -Unit 1

Strategy and Strategic Management Mission and Vision Statements Goals & Objectives Competitive advantage SWOT Analysis

 STRATEGIC PLANNING PLANNING WITH AN EXTENDED TIME FRAME COVERING WIDE SPECTRUM OF ACTIVITIES AND CONTINUOUS VIGIL ON CHANGES IN ENVIRONMENT ESPECIALLY EXTERNAL (Alfred ChandlerStrategy and Structure) Strategic, Operational and Tactical Strategic Planning is NOT Forecasting(Drucker) Levels of Strategic Planning-corporate, business(SBU),functional-----------with COORDINATION of all the three levels

Elements of strategy Goals Scope Competitive Advantage Logic

 Strategic Management involves developing a game plan to guide an organisation as it strives to achieves its goals, objectives and aims to keep it in that direction Competative Advantage indicates to a composition of factors that provides to a company an unique advantage/position in the market---------USP? Plans to acquire/attain this unique advantage---Strategies an impressionable image in the minds of customers?

Core Competencies: A Unique set of capabilities in operational areas that makes the company go beyond its competitors

Key Attributes of Strategic Management:

Directs the organization toward overall goals and objectives.
Involves the inclusion of multiple stakeholders in decision making. Needs to incorporate short-term and long-term perspectives.

Recognizes tradeoffs between efficiency and effectiveness.

The Strategic Management Process

Analyzing Goals and Objectives Analyzing the External Environment Assessing Intellectual Capital Analyzing the Internal Environment

Strategy Analysis

Formulating BusinessLevel Strategies Formulating Corporate-Level Strategies Formulating Internet Strategies Formulating International Strategies

Implementation: Strategic Controls

Implementation : Organization Design

Strategic Leadership: Excellence, Ethics, and Change

Strategic Leadership: Fostering Entrepreneurship

Strategy Formulation

Strategy Implementation

WELPOINT-HEALTHS NETWORK
Vision

WELLPOINT will redefine our industry:

Through a new generation of consumer-friendly products that put individuals back in control of their future.

Mission

The WELLPOINT companies provide health security by offering a choice of quality branded health and related financial services designed to meet the changing expectations of individuals, families and their sponsors throughout a lifelong relationship.

THREE LEVELS OF STRATEGY -TOP LEVEL/CORPORATE LEVEL -BUSINESS LEVEL -OPERATION LEVEL STRATEGY MAKERS BENEFITS OF STRATEGIC MANAGEMENT STRATEGIC MANAGEMENT AS A PROCESS

COMPANY MISSION
THE NEED FOR AN EXPLICIT MISSION FORMULATING MISSION PREAMBLE>BASIC PURPOSE>WHAT WE DO>WHERE WE DO IT> MISSION STATEMENT COMPONENTS COMPANY GOALS: SURVIVAL ,GROWTH, PROFITABILITY, PHILOSOPHY, PUBLIC IMAGE, CUSTOMERS, QUALITY

 Igor Ansoff (1965) :The common thread among the organisations, activities, and product markets, that defines the essential nature of business the the organisation was or planned to be in future. Henry Mintzerg (1987) Strategies are not always the outcome of rational planning..a pattern in a stream of decisions and actions Ansoff (1984) Basically strategy is a set of decision making rules for the guidance of organisational behaviour William Glueck: Strategy is unified, comprehensive and integrated plan that relates the strategic advantage of the firm to the challenges of the environment and is designed to ensure that the basic objectives of the enterprise are achieved through implementation process. w.Glueck Business Policy and Strategic Management McGraw Hill

 Corporate strategy is gaining importance with globalisation and privatisation It deals mostly with external environment It is being formulated at the higher levels of management It integrates-planning, implementation, evaluation& control. It is related to long-term It provides an overall direction for guiding the organisation

Components of Corporate strategy

Objectives timeframe, attainable, challenging, measurable and controllable Vector Competitive Advantage Synergy effective means to accomplish objectives. Functions of Corporate Strategy: Assists in deployment of scarce resources

 Focuses on the appropriate organisational set up, administration of organisational processes. It offers techniques to manage changes It furnishes the management with a perspective.and gives equal weight to present and future opportunities Provides management an important tool to tackle highly complex environment especially external one

Kinds of corporate strage

Stability Strategy Expansion Strategy Retrenchment Combination Strategy

Business Strategy of Porter: Cost Leadership; differentiation; focus( lower cost or differentiation/narrow target)

Case of two-wheeler industry in india

World scenario - $25 billion worth market 60% market in India and China Honda-Yamaha-Suzuki-Kawaski Japan Strategy of setting shops in low cost countries

Indian Scenario: Scooter a Fading concept we to me among customers!!; also fuel efficiency engines

The Strategic Management Process

Analyzing Goals and Objectives Analyzing the External Environment Assessing Intellectual Capital Analyzing the Internal Environment

Strategy Analysis

Formulating BusinessLevel Strategies Formulating Corporate-Level Strategies Formulating Internet Strategies Formulating International Strategies

Implementation: Strategic Controls

Implementation : Organization Design

Strategic Leadership: Excellence, Ethics, and Change

Strategic Leadership: Fostering Entrepreneurship

Strategy Formulation

Strategy Implementation

 Strategic management process in two partsinformation process part and decision making part Information process-external and internal Decision making process-development of alternatives, choice, implementation and control

Steps in Strategic management

Set out the vision, Mission External Analysis Internal analysis Strategies Formulation Business Strategy formulation Assessment and Control

SWOT ANALYSIS
STRENGTH WEAKNESSES OPPORTUNITIES THREATS

 DYNAMIC AND STABLE ENVIRONMENT CONCEPT OF LIFE CYCLE OF PRODUCTS AND DYNAMICS IN THE ENVIRONMENT CHARECTERISTICS OF DYNAMIC ENVIRONMENT STRATEGIES IN STABLE ENVIRONMENT

 PRODUCT LIFE CYCLE CONCEPT INDUSTRY PASSES THROUCH DIFFERENT PHASES

INTRODUC TION PRODUCT BUYER BEHAVIOR MARKETIN G STRAT. COMP. RISK MARGIN/P ROFITS POOR QLTY. GROWTH MATURITY DECLINE

GOOD

SUPERIOR MASS MARKET SERVICE REQD. COMP.COS T PRICE COMP. CYCLE LOW

LITTLE DIFF. SOPHIS.BU YERS <ADV. COST CONTROL EXIT/FEWE R

PERSUASIO WIDENING N >ADV. MARK.SHA RE, r&d FEW HIGH HIGH/LOW REDUCED MARK. KEY MANY GROWTH= RISK HIGHEST

LOW

 STABLE AND DYNAMIC ENVIRONMENT DIFFER DUE TO: Long-term changes in growth Changes in buyers segments Diffusion in proprietary knowledge Product innovation Process innovation Govt. policy changes Entry & exit of competitors

Industry environment is impacted by dimensions like: Industry concentration State of Industry Maturity Exposure to international competition

Characteristics of dynamic environment

Embryonic and spin-off firms Technological and Strategic uncertainty High initial costs coupled with speedy cost reduction First-time buyers Short-time horizons

Strategic choices in dynamic environment

Strategy to influence industry structure Impacting suppliers orientation Strategy of competitive advantage through low cost or product differentiation or strategic alliances Strategy of appropriate timing of entry into industry

Stable environment
Outbreaks of price, service, promotional warfare Competition becomes costly and service oriented, since buyers become knowledgeable Capacity addition difficult and hence strategy for capacity addition is the key Emergence of international competition Falling profits and reduced cash flow

Strategies in Stable environment

Product proliferation Rationalising the product mix Price cutting Excess capacity Competing internationally Market penetration Product development Michael A. Hitt, Duane Ireland, Rober E.H- Strategic Management: Competitiveness & Globalisation..6th edition by South-Western College Pub.

MISSION & VISION ANALYSIS

THE FUNDAMENTAL PURPOSE THAT SETS A FIRM APART FROM OTHER FIRMS OF ITS TYPE AND IDENTIFY THE SCOPE OF ITS OPERATION IN PRODUCTS/SERVICES AND MARKET TERMS IS DEFINED AS COMPANY MISSION MISSION IS THE ENDURING STATEMENT OF FIRMS INTENT

 Remember, the power of a Vision is not in the wording itself, but in how much your Vision truly reflects the aspirations of your organizations stakeholders (employees, clients, stockholders, etc.), and in how much it is embodied in your entire workforce everyday behaviors At Alcoa, our vision is to be the best company in the world--in the eyes of our customers, shareholders, communities and people. We expect and demand the best we have to offer by always keeping Alcoa's values top of mind.

Boeing sample vision statements 1950: Become the dominant player in commercial aircraft and bring the world into the jet age. Current: People working together as one global enterprise for aerospace leadership

Nike sample vision statements 1960s: Crush Adidas Current: To be the number one athletic company in the world Note: Browsing through the web I have found that many people confuse Mission statements with Vision statements for instance, I have found several websites claiming that Nikes Vision statement is: To bring inspiration and innovation to every athlete in the World but this is Nikes Mission statement. A Vision statement by definition is something you want to become, to achieve, it is a seductive image of an ideal future whereas a Mission statement explains the purpose of the organization why it exists it captures the organizations soul.

American Standard Company

Slogan / Motto Raising the Standard Description The American Standard Company is into supplying air-conditioning systems, plumbing products, and automotive braking systems. Their products are well-known under the brands Trane(r) and American Standard(r) for their air conditioning systems, American Standard(r) and Ideal Standard(r) for their plumbing fixtures, and WABCO(r) for their electronic braking, stability, suspension and transmission control systems. Mission Statement American Standard's mission is to "Be the best in the eyes of our customers, employees and shareholders."

Citigroup
Slogan / Motto Knowledge is your greatest asset Description Citigroup is a financial institution divided into these major segments: Global Consumer, Corporate and Investment Banking, and Global Wealth Management. Citigroup Global Consumer business offers banking services such as bank accounts, deposits, loans, portfolio and investment management, insurance, etc. The Corporate and Investment Banking business involves banking transactions on an international level. Global Wealth Management involves having portfolio management and investment advisory services. Mission Statement Our goal for Citigroup is to be the most respected global financial services company. Like any other public company, we're obligated to deliver profits and growth to our shareholders. Of equal importance is to deliver those profits and generate growth responsibly.

 IT EMBODIES THE BUSINESS PHILOSOPHY OF STRATEGY MAKERS IMPLIES THE IMAGE THE FIRM SEEKS TO PROJECT REFLECTS THE FIRMS SELF-CONCEPT INDICATES FIRMS PRINCIPAL PRODUCT/SERVICE AREAS PRIMARY CUSTOMER NEEDS THE FIRM SEEKS TO SATISFY

 NEED FOR MISSION 1. ENSURE UNIFORMITY WITHIN FIRM 2. BASIS FOR MOTIVATING THE USE OF FIRMS RESOURCES 3. ESTABLISH THE GENERAL TONE OF THE FIRM 4. TO SERVE AS A FOCAL POINT FOR THOSE WHO WISH TO MOVE FURTHER AND DETER OTHERS 5. FACILITATE FRAMING OF WORK STRUCTURE 6. TRANSLATE THE PURPOSE INTO TRANSACTION GOALS LIKE COST, TIME, PERFORMANCE PARAMETERS

 FORMULATING MISSION BUSINESS AT ITS INCEPTION BASIC PRODUCT/SERVICE/PRIMARY MARKET/PRINCIPAL TECHNOLOGY ITT BARTON(Now barton Instruments) THE UNITS MISSION IS TO SERVICE INDUSTRY AND GOVERNMENT WITH QUALITY INSTRUMENTS USED FOR THE PRIMARY MEASUREMENT, ANALYSIS, AND LOCAL CONTROL OF FLUID FLOW, LEVEL, PRESSURE, TEMPERATURE AND FLUID PROPERTIES

 Company goals: Survival, Growth,& Profitability HP :To achieve sufficient profit to finance our company growth and to provide the resources we need to achieve our other corporate objectives. Growth> HP :To let our growth be limited only by our profits and our ability to develop and produce technical products that satisfy real customer needs. The Mission statement to state the scope for diversion in growth strategies

COMPONENETS OF EXTERNAL ENVIRONMENT

ECONOMIC ENVIRONMENT SOCIAL AND CULTURAL ENVIRONMENT POLITICAL ENVIRONMENT LEGAL ENVIRONMENT TECHNOLOGICAL ENVIRONMENT NATURAL ENVIRONMENT INTERNATIONAL ENVIRONMENT COMPETITIVE ENVIRONMENT

Internal Analysis

Introduction
Strategic analysis of any Business enterprise involves two stages: Internal and External analysis.

Internal analysis is the systematic evaluation of the key internal features of an organization.
External analysis will be discussed later.

Four broad areas need to be considered for internal analysis

The organizations resources, capabilities The way in which the organization configures and co-ordinates its key valueadding activities The structure of the organization and the characteristics of its culture The performance of the organization as measured by the strength of its products.

Analysis of the global business

Global value chain analysis: configuration and co-ordination

Resources, capabilities and core competences

Cultural and structural analysis

Global products and performance

Internal analysis

Resources
Resources are assets employed in the activities and processes of the organization.

They can be tangible or intangible. They can be obtained externally (organizationaddressable) or internally generated (organizationspecific). They can be specific and non-specific:
Specific resources can only be used for highly specialized purposes and are very important to the organization in adding value to goods and services. Assets that are less specific are less important in adding value, but are more flexible.

Resources fall within several categories:

Human Financial Physical Technological Informational

An audit of resources would be likely to include an evaluation of resources in terms of availability, quantity and quality, extent of employment, sources, control systems and performance.

General Competences/capabilities
They are assets like industry-specific skills, relationships and organizational knowledge which are largely intangible and invisible assets. Competences and capabilities will often be internally generated, but may be obtained by collaboration with other organizations. Certain competences are likely common to competing businesses within a global industry or strategic group.

Core Competences/Distinctive Capabilities

Core competences or distinctive capabilities are combinations of resources and capabilities which are unique to a specific organization and which are responsible for generating its competitive advantage. Kay (1993) identified four potential sources of Core competences:
Reputation Architecture (i.e., internal and external relationship) Innovation Strategic assets

Criteria to evaluate Core Competences

Complexity: How elaborate is the bundle of resources and capabilities which comprise the core competence? Identifiability: How difficult is it to identify? Imitability: How difficult is it to imitate? Durability: How long does it be replaced by an alternative competences? Superiority: Is it clearly superior to the competences of other organizations? Adaptability: How easily can the competence be leveraged or adapted?
Customer orientation: How is the competence perceived by customers and how far is it linked to their needs?

Resources: Capabilities: Core competence human, financial, Industry-specific Distinctive and superior physical, skills, relationships, skills, technology technological, + organizational relationships, = legal, informational knowledge knowledge and Intangible reputation of the firm Tangible and and invisible Unique, and visible assets assets difficult to copy

Perceived customer benefits/value added

Inputs to the firms processes

Integration of resources into value-adding activities

Denotes feedback loop denotes core competence development

Not all capabilities are core competences only those that add greater value than those of competitors

The relationships between resources, capabilities and core competence

Global Value Chain Analysis

Competitive advantage depends on the ability of the organization to organize its resources and value-adding activities in a way that is superior to its competitors. Value chain analysis is a technique developed by Porter (1985) for understanding an organizations value-adding activities and relationship between them.

Value can be added in two ways:

By producing products at a lower cost than competitors By producing products of greater perceived value than those of competitors.

Porter extended value chain analysis to the value system, analysis of the relationship between the organization, its suppliers, distribution channels and customers.

The Value Chain

The value chain is the chain of activities which results in the final value of a businesss products.
Value added, or margin is indicated by sales revenue minus costs. Porter divided internal parts of organization into primary and support activities

Primary activities are those that directly contribute to production of good or services and organizations provision to customer Support activities are those that aid primary activities, but do not themselves add value

The Firm as a Value Chain

Support Activities Materials Management Human Resources Information Systems Company Infrastructure

R&D

Production

Marketing & Sales

Service

Primary Activities

 Certain activities or combinations of activities are

likely to relate closely to the organizations core

competences, termed core activities. They are:
Add the greatest value Add more value than the same activities in competitors value chains

Relate to and reinforce core competences

Other value chain activities relate to capabilities,

but do not add greater value than competitors

and therefore do not relate to core competence.

The Value System

The value chain of an individual organization provide an incomplete picture of its ability to add value. Many value-adding activities are shared between organizations often in the form of a collaborative network. As organizations identify and concentrate on their core competences and core activities, they increasingly outsource activities to other business for whom such activities are core.

The value system is the chain of activities from supply of resources through to final consumption of a product. The total value system, in addition to the organizations own value chain, can consists of upstream linkages with suppliers and downstream linkages with distributions and customers. The value system is a similar concept to that of the supply chain and illustrates the interactions between an organization, its suppliers, distribution channels and customers.

Supplier

Competitor

Distribution channel

Customers

Supplier

Organization

Distribution channel

Customers

Supplier

Competitor

Distribution channel

Customers

The Value System

The Global Value Chain

The configuration of an organizations activities relates to where and in how many nations each activities in the value chain is performed. Co-ordination is concerned with the management of dispersed international activities and the linkages between them. Managers must examine the current configuration of value-adding activities and the extent and methods of co-ordination as part of their strategic analysis, which may determine possibilities for reconfiguration or improving co-ordination

A global business has two broad choices of configuration:

Concentration of the activity in a limited number of locations to take advantage of benefits offered by those locations. Dispersion of the activity to a large number of locations.

Change in the business environment (e.g., technological change) may well lead to changes over time in the configuration that gives greatest competitive advantage.

Co-ordination is essentially about overseeing the complexity of the organizations configuration such that all value-adding parts of the business act in concert with each other to facilitate an effective overall synergy. Those business that overcome the potential difficulties of co-ordination are those that sustain the greatest competitive advantage. Analysis of configuration and methods of coordination assists in the process of understanding current competences and identifying the potential for strengthening and adding to them.

Core competences Core activities Value chain Configuration Concentration Dispersion Internal activities External activities

Co-ordination
Internal co-ordination
Internal linkages Value-adding activities Value system

External co-ordination
External linkages Suppliers Channels Customers

Managing the value system

Global Organizational Culture and Structure

A global business must have a culture and structure which allow it to carry out its global activities. The structure of the business must allow it to accomplish its objectives as effectively and as efficiently as possible. Culture is an important determinant of how effectively the organization operates and has important implications for employee motivation.

Portfolio Analysis
A key concept with regard to successful product or subsidiary strategy is that of portfolio. Portfolio analysis is used in evaluating the balance of an organizations range of products. A broad portfolio can spread risk across more than one market. A narrow portfolio mean that the organalization become more specialized in its knowledge of fewer products and markets

The BCG Matrix

The Boston Consulting Group (BCG) growth-share matrix is most often used by organizations in multiproduct and multimarket situations. BCG matrix offers a way of examining and making sense of a companys portfolio of product and market interests. It based on the idea that market share in mature markets is highly correlated with profitability and that is relatively less expensive and less risky to attempt to win share in the growth stage of the market.

Relative market share High

10X
1X

Low

High

Rate of market growth

Stars

Question marks

Cash cows
Low

Dogs

The Boston Consulting Group matrix

BCG Matrix: Cash cows

Cash cows: A product with a high market share in a low-growth market is normally both profitable and a generator of cash. Profits from this product can be used to support other products that are in their development phase, milked on an on going basis. Standard strategy would be to manage conservatively, but to defend strongly against competitors.

BCG Matrix: Dogs

Dogs: A product that has a low market share in a low-growth market is termed a dog in that it is typically not very profitable. Once a dog has been identified as part of a portfolio, it is often discontinued or disposed of. More creatively, a small share product can be used to price aggressively against a very large competitor as it is expensive for the large competitor to follow suit.

BCG Matrix: Stars

Stars have a high share of a rapidly growing market and therefore rapidly growing sales.
It is the sales managers dream, but the accounts nightmare. It is often necessary to spend heavily on advertising and product improvement so that when the market slows these products become cash flow. If market share is lost, the product will eventually become a dog when the market stops growing.

BCG Matrix: Question marks

Question marks are aptly named they create a dilemma. They already have a foothold in a growing market, but if market share cannot be improved they will become dogs.

Resources need to be devoted to winning market share.

Limitation of the BCG Matrix

There are many relevant aspects relating to products that are not taken into account. The imprecise nature of its four categories and the difficulties inherent in predicting future market growth.
Global activity may add extra dimension to the process of portfolio analysis.

Value Creation per Unit

Value Creation and Pricing Options

The Value Chain: Primary and Support Activities

Differentiation and Cost Structure: Roots of Competitive Advantage

Efficiency
The quantity of inputs it takes to produce a given output. Usually measured as outputs over inputs; examples of latter
No. of employees Capital investment

Productivity leads to greater efficiency and lower costs

Employee productivity Capital productivity

Quality
Superior quality = customer perception of greater value in a specific products attributes
Form, features, performance, durability, reliability, style, design

Quality products = goods and services that are reliable and that are differentiated by attributes that customers perceive to have higher value

Quality (contd)
The impact of quality on competitive advantage
High-quality products increase the value of (differentiate) the products in customers eyes Greater efficiency and lower unit costs are associated with reliable products

Innovation
The act of creating new, commercially viable products or processes
Product innovation
Creates products that customers perceive as more valuable, increasing the companys pricing options

Process innovation
Creates value by lowering production costs

Perhaps the most important building block of competitive advantage

Responsiveness to Customers
Doing a better job than competitors of identifying and satisfying customers needs
Superior quality and innovation are integral to superior responsiveness to customers Customizing goods and services to the unique demands of individual customers or customer groups

Responsiveness to Customers (contd)

Sources of enhanced customer responsiveness
Customer response time, design, service, aftersales service and support

Differentiates a companys products; leads to brand loyalty and premium pricing

Drivers of Profitability (ROIC)

Ways to Increase ROIC

Increase the companys return on sales
Reduce cost of goods sold Reduce spending on sales force, marketing, general, and administrative expenses Reduce R&D spending Increase sales revenue more than costs

Increase sales revenues from invested capital

Reduce the amount of working capital Reduce amount of fixed capital

The Durability of Competitive Advantage

Barriers to Imitation
Imitating Resources Imitating Capabilities

Capability of Competitors
Strategic commitment Absorptive capacity

Industry Dynamism

Why Companies Fail

Inertia
Companies find it difficult to change their strategies and structures

Prior strategic commitments

Limit a companys ability to imitate and cause competitive disadvantage

The Icarus paradox

A company can become so specialized based on past success that it loses sight of market realities Craftsmen, builders, pioneers, salesmen

SWOT Analysis
Strengths Weaknesses Opportunities Threats

The purpose of SWOT Analysis

It is an easy-to-use tool for developing an overview of a companys strategic situation
It forms a basis for matching your companys strategy to its situation

SWOT is the starting point

It provides an overview of the strategic situation. It provides the raw material to do more extensive internal and external analysis.

Opportunities
An OPPORTUNITY is a chance for firm growth or progress due to a favorable juncture of circumstances in the business environment. Possible Opportunities:
Emerging customer needs Quality Improvements Expanding global markets Vertical Integration

Threats
A THREAT is a factor in your companys external environment that poses a danger to its well-being. Possible Threats:
New entry by competitors Changing demographics/shifting demand Emergence of cheaper technologies Regulatory requirements

Opportunities and Threats form a basis for EXTERNAL analysis

By examining opportunities, you can discover untapped markets, and new products or technologies, or identify potential avenues for diversification. By examining threats, you can identify unfavorable market shifts or changes in technology, and create a defensive posture aimed at preserving your competitive position.

The purpose of Five-Forces Analysis

The five forces are environmental forces that impact on a companys ability to compete in a given market. The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Threat of New Entrants

Economies of Scale

Barriers to Entry

Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Scale

Government Policy Expected Retaliation

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Suppliers

Suppliers are likely to be powerful if: Supplier industry is dominated by a few firms

Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality

Suppliers products have few substitutes Buyer is not an important customer to supplier Suppliers product is an important input to buyers product

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers products are differentiated

Suppliers products have high switching costs

Supplier poses credible threat of forward integration

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Bargaining Power of Buyers

Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to sellers sales Purchase accounts for a significant fraction of suppliers sales Products are undifferentiated Buyers face few switching costs Buyers industry earns low profits Buyer presents a credible threat of backward integration Product unimportant to quality Buyers compete with the supplying industry by:

* Bargaining down prices * Forcing higher quality * Playing firms off of each other

Buyer has full information

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Bargaining Power of Buyers

Threat of Substitute Products

Threat of Substitute Products

Keys to evaluate substitute products: Products with similar function limit the prices firms can charge Products with improving price/performance tradeoffs relative to present industry products

Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery

Porters Five Forces Model of Competition

Threat of Threat of New New Entrants Entrants

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Threat of Substitute Products

Rivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:
Jockeying for strategic position Using price competition

Staging advertising battles

Increasing consumer warranties or service Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, but may be costly to smaller competitors

Rivalry Among Existing Competitors

Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry

High fixed costs High storage costs

Lack of differentiation or switching costs Capacity added in large increments Diverse competitors High strategic stakes

High exit barriers

The Five Forces are Unique to Your Industry

Five-Forces Analysis is a framework for analyzing a particular industry.
Yet, the five forces affect all the other businesses in that industry.

TYPES OF STRATEGIES

DIRECTIONAL STRATEGIES
Growth Concentration Vertical Growth Horizontal Growth Diversification Concentric Conglomerate Stability Cautiously proceed Maintain Profit Retrenchment Turnaround Divest/Sale Liquidation

STRATEGIC ALTERNATIVES
Generic or grand or basic strategies Stability - better after sales service, modernize plant, bulk discount, Improve performance to sustain Expansion - Change in customer group, function, technology Retrenchment - Withdrawal - Customer group, function, technology (unprofitable) Combination E.g. Wide variety of services to customers (stability) - New products in product range (expansion)

STRATEGIC ALTERNATIVES
Michael Porter - Three type of generic strategies - Overall cost leadership strategy - Differentiation strategy - Focus on niche market

DIMENSIONS OF GRAND/GENERIC STRATEGIES

I. Internal/External
- Independent of any other entity - Association with other entity II. Related/Unrelated - To existing customer groups, existing customer function, technologies

DIMENSIONS OF GRAND/GENERIC STRATEGIES

III. Horizontal/Vertical - Serving additional customer groups -consolidating backward/forward IV. Active/Passive Active - offensive strategy Passive - Defensive strategy 4 grand strategies 4 dimensions 2 types of each dimensions 3 dimensions of each business definition = 96 Mixed strategies

MODERNIZATION STRATEGIES
Developing new technology strategy i.e. technological upgradation as a strategy - Increased production, lower cost, improve efficiency and productivity - Extensively used by Indian organization stability - prior to expansion & diversification If pace of modernization is low - internal stability strategy, high - internal expansion strategy Merge with another company - for modern external expansion strategy

DIVERSIFICATION AND INTEGRATION STRATEGIES

1. Vertical Integration - make new products to serve its own needs - backward/forward integration 2. Horizontal Integration - Same product - more customer group - merger similar companies Spartek Ceramics takeover of Neyveli Ceramics

DIVERSIFICATION AND INTEGRATION STRATEGIES 3. Concentric diversification

Marketing & technology related - rain coat manufacturer rubber based items - gloves, shoes Technology related- leasing company - hire purchase Marketing related - Unrelated technology (cosmetic & sewing machines - women) 4. Conglomerate diversification - Unrelated to customer groups, function, technology ITC - Cigarette & Hotel TTK group - Chemicals, hosiery, contraceptives

MERGER, TAKEOVER AND JOINT VENTURE STRATEGIES

Diversification & Integration Merger ( Amalgamation) A acquires B - B merged with A A&B C - Consolidated

Horizontal Vertical

Concentric Conglomerate

JOINT VENTURE
2 firms in one industry 2 firms across different industries Indian & foreign firm in India Indian & foreign firm in foreign country Indian & foreign firm in third country Last two types are on increase now

TURNAROUND STRATEGIES
Reversing a negative trend Retrenchment - internal/external - improve internal efficiency - Divestment/liquidation Danger signs: Persistent negative cash flows Negative profits Declining market share Deterioration in physical facilities High turnover, low morale, Mismanagement Uncompetitive products, sick company

MANAGING TURNAROUND
Existing team - support external consultant credibility - rare Existing team - withdraws temporarily - turnaround specialist - employed Replace existing team / C.E Approaches: - Surgical - Human approach

ACTION PLAN FOR TURNAROUND

Analysis of product, market, production process, competition, market segment positioning Clear thinking - market place &production logic Implementation of plans - target - setting, feedback, remedial action

DIVESTMENT
Divestment - (divestiture or cutback) - sale of or liquidation of a portion of business - SBU or profit center 1. Spinning it off - financially and managerially independent company with stake 2. Sell a unit outright Kelvinator India - spin-off - Avanti scooters - high production cost

LIQUIDATION
Rarely - large companies liquidate Buyers rare for purchase of assets Court, voluntary, subject to supervision of court Combination strategies - popular

Criteria for strategic choice

Does strategy exploit the opportunities present in the environment? Is it consistent with the resources of the firm, its competitive advantage & core competence? Is the chosen level of risk feasible? Is it appropriate to the values & aspirations of the firm?

 Gap Analysis
Desired

Perf. gap Present

t1

t2

Consider the Selection factor. -- Criteria for evaluation alternatives. Evaluate strategic alternatives. Make choice

Factors affecting strategic choice

Nature of environment stable? Firms internal realities Ambition of CEO / owners Company culture Firms capacity to execute the st. Resource allocation

Strategy Implementation
Evolve a systematic procedure to implement the strategy chosen
Procedural implementation plan Proper resource allocation plan Structural implementation plan Functional implementation plan Behavioural implementation plan

Evaluate and control through strategic and operational control measures Success of a strategy is very much dependent on how the strategy is executed