Strategicmanagementfullnotes 4TH SEM

8/17/2019 Strategicmanagementfullnotes 4TH SEM

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STRATEGIC MANAGEMENT


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Concept, Meaning, Definition:

Strategy is the determination of the long-term goals and objectives of an enterprise

and the adoption of the courses of action and the allocation of resources necessary for

carrying out these goals. Strategy is management’s game plan for strengthening the

organization’s position, pleasing customers, and achieving performance targets.

Types of strategy

Strategy can be formulated on three different levels:

• corporate level

• business unit level

• functional or departmental level.

Corporate Level Strategy

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Corporate level strategy fundamentally is concerned with the selection of businesses

in which the company should compete and with the development and coordination of

that portfolio of businesses.

Corporate level strategy is concerned with:

• each - defining the issues that are corporate responsibilities! these might

include identifying the overall goals of the corporation, the types of businesses

in which the corporation should be involved, and the way in which businesses

will be integrated and managed.

• Competitive Contact - defining where in the corporation competition is to be

localized.

• "anaging #ctivities and $usiness %nterrelationships - Corporate strategy see&s

to develop synergies by sharing and coordinating staff and other resources

across business units, investing financial resources across business units, and

using business units to complement other corporate business activities. %gor

#nsoff introduced the concept of synergy to corporate strategy.• "anagement 'ractices - Corporations decide how business units are to be

governed: through direct corporate intervention (centralization) or through

more or less autonomous government (decentralization) that relies on

persuasion and rewards.

Corporations are responsible for creating value through their businesses. *hey do so

by managing their portfolio of businesses, ensuring that the businesses are successful

over the long-term, developing business units, and sometimes ensuring that each

business is compatible with others in the portfolio.

Bsiness !nit Level Strategy

# strategic business unit may be a division, product line, or other profit center that

can be planned independently from the other business units of the firm.

#t the business unit level, the strategic issues are less about the coordination of

operating units and more about developing and sustaining a competitive advantage for

the goods and services that are produced. #t the business level, the strategy

formulation phase deals with:

• positioning the business against rivals

• anticipating changes in demand and technologies and adjusting the strategy to

accommodate them

• influencing the nature of competition through strategic actions such as vertical

integration and through political actions such as lobbying.

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"ichael 'orter identified three generic strategies (cost leadership, differentiation, and

focus) that can be implemented at the business unit level to create a competitive

advantage and defend against the adverse effects of the five forces.

"nctional Level Strategy

*he functional level of the organization is the level of the operating divisions and

departments. *he strategic issues at the functional level are related to business

processes and the value chain. +unctional level strategies in mar&eting, finance,

operations, human resources, and involve the development and coordination of

resources through which business unit level strategies can be eecuted efficiently and

effectively.

+unctional units of an organization are involved in higher level strategies by providing

input into the business unit level and corporate level strategy, such as providing

information on resources and capabilities on which the higher level strategies can be

based. /nce the higher-level strategy is developed, the functional units translate itinto discrete action-plans that each department or division must accomplish for the

strategy to succeed.

STRATEGIC MANAGEMENT

Strategic management is defined as the art and science of formulating, implementing,

and evaluating cross-functional decisions that enable the organization to achieve itsobjectives.0 1enerally, strategic management is not only related to a single

specialization but covers cross-functional or overall organization.

• Strategic management is a comprehensive area that covers almost all the

functional areas of the organization. %t is an umbrella concept of management

that comprises all such functional areas as mar&eting, finance account,

human resource, and production operation into a top level management

discipline. *herefore, strategic management has an importance in the

organizational success and failure than any specific functional areas.

• Strategic management deals with organizational level and top level issues

whereas functional or operational level management deals with the specific

areas of the business.

• *op-level managers such as Chairman, "anaging irector, and corporate level

planners involve more in strategic management process.

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• Strategic management relates to setting vision, mission, objectives, and

strategies that can be the guideline to design functional strategies in other

functional areas

• *herefore, it is top-level management that paves the way for other functional or

operational management in an organization

Definition:

2*he determination of the basic long-term goals objectives of an enterprise and the

adoption of the course of action and the allocation of resources necessary for carrying

out these goals3.

-C#an$ler

STRATEGIC MANAGEMENT M%DEL & STRATEGIC 'LANNING 'R%CESS

%n today4s highly competitive business environment, budget-oriented planning

or forecast-based planning methods are insufficient for a large corporation to survive

and prosper. *he firm must engage in strategic planning that clearly defines

objectives and assesses both the internal and eternal situation to formulate strategy,

implement the strategy, evaluate the progress, and ma&e adjustments as necessary to

stay on trac&.

# simplified view of the strategic planning process is shown by the following diagram:

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a( STRATEGIC INTENT

Strategic intent ta&es the form of a number of corporate challenges and opportunities,

specified as short term projects. *he strategic intent must convey a significant stretch

for the company, a sense of direction, which can be communicated to all employees. %t

should not focus so much on today4s problems, but rather on tomorrow4s

opportunities. Strategic intent should specify the competitive factors, the factors

critical to success in the future.

Strategic intent gives a picture about what an organization must get into immediately

in order to use the opportunity. Strategic intent helps management to emphasize and

concentrate on the priorities. Strategic intent is, nothing but, the influencing of an

organization’s resource potential and core competencies to achieve what at first may

seem to be unachievable goals in the competitive environment.

)( Environ*ental Scan

*he environmental scan includes the following components:

• #nalysis of the firm (%nternal environment)

• #nalysis of the firm4s industry (micro or tas& environment)

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• #nalysis of the 5ternal macro environment ('5S* analysis)

*he internal analysis can identify the firm4s strengths and wea&nesses and the

eternal analysis reveals opportunities and threats. # profile of the strengths,

wea&nesses, opportunities, and threats is generated by means of a S6/* analysis

#n industry analysis can be performed using a framewor& developed by "ichael 'orter

&nown as 'orter4s five forces. *his framewor& evaluates entry barriers, suppliers,

customers, substitute products, and industry rivalry.

c( Strategy "or*lation

Strategy +ormulation is the development of long-range plans for the effective

management of environmental opportunities and threats, in light of corporate

strengths wea&ness. %t includes defining the corporate mission, specifying

achievable objectives, developing strategy setting policy guidelines.

i) "ission"ission is the purpose or reason for the organization’s eistence. %t tells what

the company is providing to society, either a service li&e house&eeping or a

product li&e automobiles.

ii) /bjectives

/bjectives are the end results of planned activity. *hey state what is to be

accomplished by when and should be 7uantified, if possible. *he achievement of

corporate objectives should result in the fulfillment of a corporation’s mission.

iii) Strategies

Strategy is the comple plan for bringing the organization from a given posture

to a desired position in a future period of time.

d) 'olicies

# policy is a broad guide line for decision-ma&ing that lin&s the formulation of

strategy with its implementation. Companies use policies to ma&e sure that employees

throughout the firm ma&e decisions ta&e actions that support the corporation’s

mission, objectives strategy.

$( Strategy I*ple*entation

%t is the process by which strategy policies are put into actions through the

development of programs, budgets procedures. *his process might involve changes

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within the overall culture, structure and8or management system of the entire

organization.

i) 'rograms:

%t is a statement of the activities or steps needed to accomplish a single-use plan.

%t ma&es the strategy action oriented. %t may involve restructuring the corporation,

changing the company’s internal culture or beginning a new research effort.

ii) $udgets:

# budget is a statement of a corporations program in terms of dollars. 9sed in

planning control, a budget lists the detailed cost of each program. *he budget

thus not only serves as a detailed plan of the new strategy in action, but also

specifies through proforma financial statements the epected impact on the firm’s

financial future

iii) 'rocedures:

'rocedures, sometimes termed Standard /perating 'rocedures (S/') are a system

of se7uential steps or techni7ues that describe in detail how a particular tas& or job

is to be done. *hey typically detail the various activities that must be carried out in

order to complete

e( Evalation + Control

#fter the strategy is implemented it is vital to continually measure and evaluate

progress so that changes can be made if needed to &eep the overall plan on trac&.

*his is &nown as the control phase of the strategic planning process. 6hile it may benecessary to develop systems to allow for monitoring progress, it is well worth the

effort. *his is also where performance standards should be set so that performance

may be measured and leadership can ma&e adjustments as needed to ensure success.

5valuation and control consists of the following steps:

i) efine parameters to be measured

ii) efine target values for those parameters

iii) 'erform measurements

iv) Compare measured results to the pre-defined standard

v) "a&e necessary changes

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STAE-%LDERS IN B!SINESS

# corporate sta&eholder is a party that can affect or be affected by the actions of the

business as a whole. Sta&eholder groups vary both in terms of their interest in the

business activities and also their power to influence business decisions. ere is the

summary:

*he sta&e holders of a company are as follows

• Shareholders

• Creditors

• irectors and managers

• 5mployees

• Suppliers• Customers

• Community

• 1overnment

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Sta.e#ol$er Main Interests 'o/er an$ inflence

S#are#ol$ers'rofit growth, Share

price growth, dividends5lection of directors

Cre$itors

%nterest and principal to

be repaid, maintain

credit rating

Can enforce loancovenants and Can

withdraw ban&ing

facilities

Directors an$

*anagers

Salary ,share options,

job satisfaction, status

"a&e decisions, have

detailed information

E*ployees

Salaries wages, job

security, job satisfaction

motivation

Staff turnover, industrial

action, service 7uality

Sppliers;ong term contracts,prompt payment, growth

of purchasing

'ricing, 7uality, product

availability

Csto*ers eliable 7uality, value for

money, product

availability, customer

evenue 8 repeat

business, 6ord of mouth

recommendation

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service

Co**nity5nvironment, local jobs,

local impact

%ndirect via local

planning and opinion

leaders

Govern*ent/perate legally, ta

receipts, jobs

egulation, subsidies,

taation, planning

0ISI%N, MISSI%N AND '!R'%SE

0ISI%N STATEMENT


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world-class in-flight services4. *he reason for not including 4how4 is that 4how4 may

&eep on changing with time.

C#allenges relate$ to 0ision State*ent:

'utting-up a vision is not a challenge. *he problem is to ma&e employees engaged

with it. "any a time, terms li&e vision, mission and strategy become more a subject of

scorn than being loo&ed up-to. *his is primarily because leaders may not be able to

ma&e a connect between the vision8mission and people’s every day wor&. *oo often,

employees see a gap between the vision, mission and their goals priorities. 5ven if

there is a valid8tactical reason for this mis-match, it is not eplained.

-ori1on of 0ision:

? years. %f it is less than that, it becomes tactical. %f

it is of a horizon of @?A years (say), it becomes difficult for the strategy to relate to

the vision.

"eatres of a goo$ vision state*ent:

•

5asy to read and understand.• Compact and Crisp to leave something to people’s imagination.

• 1ives the destination and not the road-map.

• %s meaningful and not too open ended and far-fetched.

• 5cite people and ma&e them get goose-bumps.

• 'rovides a motivating force, even in hard times.

• %s perceived as achievable and at the same time is challenging and compelling,

stretching us beyond what is comfortable.

0ision is a $rea*&aspiration, fine2tne$ to reality:

*he 5ntire process starting from


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could be 4*o be among most admired luury brands in the world4 and mission could be

4*o add style to the lives4

A goo$ *ission state*ent /ill )e :

• Clear an$ Crisp: 6hile there are different views, 6e strongly recommend that

mission should only provide what, and not 4how and when4. 6e would prefer the

mission of 4"a&ing 'eople meet their career4 to 4"a&ing people meet their

career through effective career counseling and education4. # mission statement

without 4how when4 element leaves a creative space with the organization to

enable them ta&e-up wider strategic choices.

• ave to have a very visi)le lin.age to the business goals and strategy:

+or e4a*ple you cannot have a mission (for a home furnishing company) of

4$ringing Style to 'eople’s lives4 while your strategy as&s for mass product and

selling. %ts better that either you start selling high-end products to high value

customers, / change your mission statement to 4elp people build homes4.• S#ol$ not )e sa*e as t#e *ission of a competing organization. %t should

touch upon how its purpose it uni7ue.

Mission follo/s t#e 0ision:

*he 5ntire process starting from


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Solutions for a small planet

"ission

#t %$", we strive to lead in the invention, development and manufacture of the

industry4s most advanced information technologies, including computer systems,

software, storage systems and microelectronics.

6e translate these advanced technologies into value for our customers through our

professional solutions, services and consulting businesses worldwide.

B!SINESS, %B6ECTI0ES AND G%ALS

# business (also &nown as enterprise or firm) is an organization engaged in the trade

of goods, services, or both to consumers. $usinesses are predominant

in capitalist economies, in which most of them are privately owned and administered

to earn profit to increase the wealth of their owners. $usinesses may also be not-for-profit or state-owned. # business owned by multiple individuals may be referred to as

a company, although that term also has a more precise meaning.

1oals : %t is where the business wants to go in the future, its aim. %t is a statement of

purpose, e.g. we want to grow the business into 5urope./bjectives: /bjectives give the business a clearly defined target. 'lans can then be

made to achieve these targets. *his can motivate the employees. %t also enables the

business to measure the progress towards to its stated aims.

T#e Difference )et/een goals an$ o)7ectives

• 1oals are broad! objectives are narrow.

• 1oals are general intentions! objectives are precise.

• 1oals are intangible! objectives are tangible.

• 1oals are abstract! objectives are concrete.

• 1oals can4t be validated as is! objectives can be validated.

C%R'%RATE G%0ERNANCE

Corporate governance generally refers to the set of mechanisms that influence the

decisions made by managers when there is a separation of ownership and control.

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*he evolution of public ownership has created a separation between ownership and

management. $efore the @?th century, many companies were small, family owned

and family run. *oday, many are large international conglomerates that trade publicly

on one or many global echanges.

%n an attempt to create a corporation where stoc&holders4 interests are loo&ed after,

many firms have implemented a two-tier corporate hierarchy. /n the first tier is the

board of directors: these individuals are elected by the shareholders of the

corporation. /n the second tier is the upper management: these individuals are hired

by the board of directors.

S#are #ol$ers

# shareholder or stoc&holder is an individual or institution (including a corporation)

that legally owns one or more shares of stoc& in a public or private corporation.

Shareholders own the stoc&, but not the corporation itself.

Stoc&holders are granted special privileges depending on the class of stoc&. *hese

rights may include:

• *he right to sell their shares,

• *he right to vote on the directors nominated by the board,

• *he right to nominate directors (although this is very difficult in practice

because of minority protections) and propose shareholder resolutions,• *he right to dividends if they are declared,

• *he right to purchase new shares issued by the company, and

Boar$ of Directors

5lected by the shareholders, the board of directors is made up of two types of

representatives. *he first type involves individuals chosen from within the company.

*his can be a C5/, C+/, manager or any other person who wor&s for the company on

a daily basis. *he other type of representative is chosen eternally and is considered

to be independent from the company. *he role of the board is to monitor the

managers of a corporation, acting as an advocate for stoc&holders. %n essence, the

board of directors tries to ma&e sure that shareholders4 interests are well served.

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$oard members can be divided into three categories:

• Chairman B *echnically the leader of the corporation, the chairman of the board

is responsible for running the board smoothly and effectively. is or her duties

typically include maintaining strong communication with the chief eecutive

officer and high-level eecutives, formulating the company4s business strategy,

representing management and the board to the general public and

shareholders, and maintaining corporate integrity. # chairman is elected from

the board of directors.

• Inside Directors B *hese directors are responsible for approving high-level

budgets prepared by upper management, implementing and monitoring

business strategy, and approving core corporate initiatives and projects. %nside

directors are either shareholders or high-level management from within the

company. %nside directors help provide internal perspectives for other board

members. *hese individuals are also referred to as eecutive directors if theyare part of company4s management team.

• Outside Directors B 6hile having the same responsibilities as the inside

directors in determining strategic direction and corporate policy, outside

directors are different in that they are not directly part of the management

team. *he purpose of having outside directors is to provide unbiased and

impartial perspectives on issues brought to the board.

Manage*ent Tea*

#s the other tier of the company, the management team is directly responsible for the

day-to-day operations (and profitability) of the company.• Chief Executive Officer (CEO) B #s the top manager, the C5/ is typically

responsible for the entire operations of the corporation and reports directly to

the chairman and board of directors. %t is the C5/4s responsibility to implement

board decisions and initiatives and to maintain the smooth operation of the

firm, with the assistance of senior management. /ften, the C5/ will also be

designated as the company4s president and therefore also be one of the inside

directors on the board (if not the chairman).

• Chief Operations Officer (COO) B esponsible for the corporation4s operations,

the C// loo&s after issues related to mar&eting, sales, production and

personnel. "ore hands-on than the C5/, the C// loo&s after day-to-day

activities while providing feedbac& to the C5/. *he C// is often referred to as a

senior vice president.

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• Chief Finance Officer (CFO) B #lso reporting directly to the C5/, the C+/ is

responsible for analyzing and reviewing financial data, reporting financial

performance, preparing budgets and monitoring ependitures and costs. *he

C+/ is re7uired to present this information to the board of directors at regular

intervals and provide this information to shareholders and regulatory bodies

such as the Securities and 5change Commission (S5C). #lso usually referred to

as a senior vice president, the C+/ routinely chec&s the corporation4s financial

health and integrity.

Need & Significance

>) Changing ownership Structure:

*he profile of corporate ownership has changed significantly. 'ublic

financial institutions are the single largest shareholder is the most of the large

corporations in the private sector. %nstitutional inventors and mutual funds have nowbecome singly or jointly direct challenges to management of companies.

@) Social esponsibility:

# company is a legal entity without physical eistence. *herefore, it is

managed by board of directors which is accountable and responsible to share holders

who provide the funds. irectors are also re7uired to act in the interests of customers,

lenders, suppliers and the local community for enhancing shareholders value.

) Scams

%n recent years several corporate frauds have sha&en the public

confidence. # large number of companies have been transferred to D group by the$ombay stoc& echange.

E) Corporate /ligarchy:

Shareholder activism and share holder democracy continue to remain

myths in %ndia. 'ostal ballot system is still absent. 'roies are not allowed to spea& at

the meetings. Shareholders’ association, inventor’s education and awareness have not

emerged as a countervailing force.

=) 1lobalization

#s %ndian companies went to overseas mar&ets for capital, corporate

governance become a buzz world.

Fundamental Principles of Corporate Governance8

>) *ransparency

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%t means accurate, ade7uate timely disclosure of relevant information

to the sta&eholders. 6ithout transparency, it is impossible to ma&e any progress

towards good governance. $usiness heads should realize that transparency also

creates immense shareholder value.

@) #ccountability

Corporate 1overnance has to be a top down approach. Chairman, $oard

of irectors Chief 5ecutives must fulfill their responsibilities to ma&e corporate

governance a reality in %ndian industry. #ccountability also favours the objective of

creating shareholders value

) "erit $ased "anagement

# strong $oard of irectors is necessary to lead and support merit based

management. *he board has to be an independent, strong and non- partisan body

where the sole motive should be decision-ma&ing through business prudence.

Trends in Corporate Governance:• $oards are getting more involved not only in reviewing evaluating

company strategic but also in shaping.

• %nstitutional investors such as pension’s funds, mutual funds, insurance

companies are becoming active on boards, and are putting increase

pressure on top management to improve corporate performances.

• Fone affiliated outside directors are increasing their numbers and power in

publicly held corporation’s as C5/’s loosen their grips on boards. /utside

members are ta&ing charge of annual C5/ evaluation.

• $oards are getting smaller, partially because of the reduction in the

number of insiders but also because boards desire new directors to have

specialized &nowledge epertise instead of general eperience.

• $oards continue to ta&e more control of board functions by either splitting

the combined chair8C5/ position into two separate positions or establishing

a lead outside director position.

• #s corporations become more global, they are increasingly loo&ing for

international eperience in their board members.

S%CIAL RES'%NSIBILIT5

Corporate social responsibility is the interaction between business and the social

environment in which it eists. $owen argued that corporate social responsibility rests

on two premises: social contract, which is an implied set of rights and obligations that

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are inherent to social policy and assumed by business, and moral agent, which

suggests that businesses have an obligation to act honorably and to reflect and

enforce values that are consistent with those of society.

T#e T#ree 'erspectives of Social Responsi)ility

*he three perspectives of corporate social responsibility are economic

responsibility, public responsibility, and social responsiveness. *he three perspectives

represent a continuum of commitment to social responsibility issues, ranging from

economic responsibility at the low end and social responsiveness at the high end. *he

economic responsibility perspective argues that the only social responsibility of

business is to maimize profits within the 2rules of the game.3 "oreover, the

proponents of this viewpoint argue that organizations cannot be moral agents. /nly

individuals can be moral agents. %n contrast, the public responsibility perspective

argues that businesses should act in a way that is consistent with society’s view of responsible behavior, as well as with established laws and policy. +inally, the

proponents of the social responsiveness perspective argue that businesses should

proactively see& to contribute to society in a positive way. #ccording to this view,

organizations should develop an internal environment that encourages and supports

ethical behavior at an individual level.

Different approac#es of CSR

*he stoc&holder view is much narrower, and only views the stoc&holders (i.e.,

owners) of a firm. *he stoc&holder view of the organization would tend to be aligned

closer to the economic responsibility view of social responsibility. *he sta&eholder view

of the organization argues that anyone who is affected by or can affect the activities of

a firm has a legitimate 2sta&e3 in the firm. *his could include a broad range of

population. *he sta&eholder view can easily include actions that might be labeled

public responsibility and social responsiveness.

Sta&eholders: #ll those who are affected by or can affect the activities of an

organization.

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>. 'rimary Sta&eholders: *he primary sta&eholders of a firm are those who have a

formal, official, or contractual relationship with the organization. *hey include

owners (stoc&holders), employees, customers, and suppliers.

@. Secondary Sta&eholders: *he secondary sta&eholders of a firm are other societal

groups that are affected by the activities of the firm. *hey include consumer

groups, special interest groups, environmental groups, and society at large.

*he globalization of the business environment has had a remar&able impact on issues

of social responsibility. #s organizations become involved in the international field,

they often find that their sta&eholder base becomes wider and more diverse. #s a

result, they must cope with social responsibility related issues across a broad range of

cultural and geographic orientations.

*he four strategies for social responsibility represent a range, with the reaction

strategy on one end (i.e., do nothing) and the proaction strategy on the other end

(do much). *he defense and accommodation strategies are in the middle.

(reaction, defense, accommodation, and proaction). 5amples of firms that have

pursued these strategies are as follows:

• eaction: /ver E? years ago, the medical department of the "anville Corporation

discovered evidence to suggest that asbestos inhalation causes a debilitating and

often fatal lung disease. ather than loo&ing for ways to provide safer wor&ingconditions for company employees, the firm chose to conceal the evidence. %t

appears that tobacco companies have done the same thing.

• efense: /ver the years, rather than demonstrating social responsiveness in terms

of air pollution reductions, vehicle safety, and gas shortages, the automobile

companies did little to confront the problems head on. Currently, the high demand

for pic&up truc&s and S9


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contributions to literacy programs and was one of the first companies to give health

benefits to partners.

!NIT 9 II C%M'ETITI0E AD0ANTAGE

5ternal 5nvironment - 'orter’s +ive +orces "odel-Strategic 1roups Competitive

Changes during %ndustry 5volution-1lobalization and %ndustry Structure - Fational

Contet and Competitive advantage esources- Capabilities and competenciesBcore

competencies-;ow cost and differentiation 1eneric $uilding $loc&s of Competitive

#dvantage- istinctive Competencies-esources and Capabilities durability of

competitive #dvantage- #voiding failures and sustaining competitive advantage-Case

study.

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$9S%F5SS 5F


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%t refers to the environment that has an indirect influence on the business. *he factors

are uncontrollable by the business. *he two types of eternal environment are micro

environment and macro environment.

a( MICR% EN0IR%NMENTAL "ACT%RS

*hese are eternal factors close to the company that have a direct impact on the

organizations process. *hese factors include:

i( S#are#ol$ers

#ny person or company that owns at least one share (a percentage of

ownership) in a company is &nown as shareholder. # shareholder may

also be referred to as a 0stoc&holder0. #s organization re7uires greater

inward investment for growth they face increasing pressure to move from

private ownership to public. owever this movement unleashes the forces

of shareholder pressure on the strategy of organizations.

ii( Sppliers

#n individual or an organization involved in the process of ma&ing aproduct or service available for use or consumption by a consumer or

business user is &nown as supplier. %ncrease in raw material prices will

have a &noc& on affect on the mar&eting mi strategy of an organization.

'rices may be forced up as a result. # closer supplier relationship is one

way of ensuring competitive and 7uality products for an organization.

iii( Distri)tors

5ntity that buys non-competing products or product-lines, warehouses

them, and resells them to retailers or direct to the end users or

customers is &nown as distributor. "ost distributors provide strongmanpower and cash support to the supplier or manufacturer4s

promotional efforts. *hey usually also provide a range of services (such

as product information, estimates, technical support, after-sales services,

credit) to their customers. /ften getting products to the end customers

can be a major issue for firms. *he distributors used will determine the

final price of the product and how it is presented to the end customer.

6hen selling via retailers, for eample, the retailer has control over

where the products are displayed, how they are priced and how much

they are promoted in-store. Gou can also gain a competitive advantage

by using changing distribution channels.

iv( Csto*ers

# person, company, or other entity which buys goods and services

produced by another person, company, or other entity is &nown as

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customer. /rganizations survive on the basis of meeting the needs, wants

and providing benefits for their customers. +ailure to do so will result in a

failed business strategy.

v( Co*petitors

# company in the same industry or a similar industry which offers a

similar product or service is &nown as competitor. *he presence of one or

more competitors can reduce the prices of goods and services as the

companies attempt to gain a larger mar&et share. Competition also

re7uires companies to become more efficient in order to reduce costs.

+ast-food restaurants "conald4s and $urger Hing are competitors, as

are Coca-Cola and 'epsi, and 6al-"art and *arget.

vi( Me$ia

'ositive or adverse media attention on an organisations product or

service can in some cases ma&e or brea& an organisation.. Consumer

programmes with a wider and more direct audience can also have a verypowerful and positive impact, hforcing organisations to change their

tactics.

)( MACR% EN0IR%NMENTAL "ACT%RS

#n organization4s macro environment consists of nonspecific aspects in the

organization4s surroundings that have the potential to affect the organization4s

strategies. 6hen compared to a firm4s tas& environment, the impact of macro

environmental variables is less direct and the organization has a more limited impact

on these elements of the environment. *he macro environment consists of forces thatoriginate outside of an organization and generally cannot be altered by actions of the

organization. %n other words, a firm may be influenced by changes within this element

of its environment, but cannot itself influence the environment. "acro environment

includes political, economic, social and technological factors. # firm considers these as

part of its environmental scanning to better understand the threats and opportunities

created by the variables and how strategic plans need to be adjusted so the firm can

obtain and retain competitive advantage.

i( 'olitical "actors

'olitical factors include government regulations and legal issues and define both

formal and informal rules under which the firm must operate. Some eamples

include:

I ta policy

I employment laws

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I environmental regulations

I trade restrictions and tariffs

I political stability

ii( Econo*ic "actors

5conomic factors affect the purchasing power of potential customers and the

firm4s cost of capital. *he following are eamples of factors in the

macroeconomy:

I economic growth

I interest rates

I echange rates

I inflation rate

iii( Social "actors

Social factors include the demographic and cultural aspects of the eternal

macro environment. *hese factors affect customer needs and the size of

potential mar&ets. Some social factors include:I health consciousness

I population growth rate

I age distribution

I career attitudes

I emphasis on safety

iv( Tec#nological "actors

*echnological factors can lower barriers to entry, reduce minimum efficient

production levels, and influence outsourcing decisions. Some technological

factors include:I activity

I automation

I technology incentives

I rate of technological change

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*hese forces are defined as follows:

a) *he threat of the entry of new competitors

b) *he intensity of competitive rivalry

c) *he threat of substitute products or services

d) *he bargaining power of customers

e) *he bargaining power of suppliers

*he model of the +ive Competitive +orces was developed by "ichael 5. 'orter. 'orters

model is based on the insight that a corporate strategy should meet the opportunities

and threats in the organizations eternal environment. 5specially, competitive strategy

should base on and understanding of industry structures and the way they change.

'orter has identified five competitive forces that shape every industry and every

mar&et. *hese forces determine the intensity of competition and hence the profitability

and attractiveness of an industry. *he objective of corporate strategy should be to

modify these competitive forces in a way that improves the position of the

organization. 'orters model supports analysis of the driving forces in an industry.

$ased on the information derived from the +ive +orces #nalysis, management can

decide how to influence or to eploit particular characteristics of their industry.

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*he +ive Competitive +orces are typically described as follows:

a( Bargaining 'o/er of Sppliers

*he term 4suppliers4 comprises all sources for inputs that are needed in order to

provide goods or services.

Supplier bargaining power is li&ely to be high when:

• *he mar&et is dominated by a few large suppliers rather than a fragmented

source of supply

• *here are no substitutes for the particular input

• *he suppliers customers are fragmented, so their bargaining power is low

• *he switching costs from one supplier to another are high

• *here is the possibility of the supplier integrating forwards in order to obtainhigher prices and margins

*his threat is especially high when

• *he buying industry has a higher profitability than the supplying industry

• +orward integration provides economies of scale for the supplier

• *he buying industry hinders the supplying industry in their development (e.g.

reluctance to accept new releases of products)

• *he $uying industry has low barriers to entry.

%n such situations, the buying industry often faces a high pressure on margins from

their suppliers. *he relationship to powerful suppliers can potentially reduce strategic

options for the organization.

)( Bargaining 'o/er of Csto*ers

Similarly, the bargaining power of customers determines how much customers

can impose pressure on margins and volumes. Customers bargaining power isli&ely to be high when

• *hey buy large volumes! there is a concentration of buyers

• *he supplying industry comprises a large number of small operators

• *he supplying industry operates with high fied costs

• *he product is undifferentiated and can be replaces by substitutes

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• Switching to an alternative product is relatively simple and is not related

to high costs

• Customers have low margins and are pricesensitive

• Customers could produce the product themselves

• *he product is not of strategical importance for the customer

• *he customer &nows about the production costs of the product• *here is the possibility for the customer integrating bac&wards.

c( T#reat of Ne/ Entrants

*he competition in an industry will be the higher, the easier it is for other

companies to enter this industry. %n such a situation, new entrants could change

major determinants of the mar&et environment (e.g. mar&et shares, prices,

customer loyalty) at any time. *here is always a latent pressure for reaction

and adjustment for eisting players in this industry. *he threat of new entries

will depend on the etent to which there are barriers to entry.

*hese are typically

• 5conomies of scale (minimum size re7uirements for profitable

operations),

• igh initial investments and fied costs

• Cost advantages of eisting players due to eperience curve effects of

operation with fully depreciated assets

• $rand loyalty of customers

• 'rotected intellectual property li&e patents, licenses etc,

• Scarcity of important resources, e.g. 7ualified epert staff

• #ccess to raw materials is controlled by eisting players, J istribution

channels are controlled by eisting players

• 5isting players have close customer relations, e.g. from long-term

service contracts

• igh switching costs for customers

• ;egislation and government action

$( T#reat of S)stittes

# threat from substitutes eists if there are alternative products with lower

prices of better performance parameters for the same purpose. *hey could

potentially attract a significant proportion of mar&et volume and hence reduce

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the potential sales volume for eisting players. *his category also relates to

complementary products.

Similarly to the threat of new entrants, the treat of substitutes is determined by

factors li&e

• $rand loyalty of customers

• Close customer relationships

• Switching costs for customers

• *he relative price for performance of substitutes

• Current trends.

e( Co*petitive Rivalry )et/een E4isting 'layers

*his force describes the intensity of competition between eisting players

(companies) in an industry. igh competitive pressure results in pressure on

prices, margins, and hence, on profitability for every single company in the

industry.Competition between eisting players is li&ely to be high when

• *here are many players of about the same size

• 'layers have similar strategies

• *here is not much differentiation between players and their products,

hence, there is much price competition

• ;ow mar&et growth rates (growth of a particular company is possible only

at the epense of a competitor)

• $arriers for eit are high (e.g. epensive and highly specialized

e7uipment)

STRATEGIC GR%!'S

Strategic groups are sets of firms within an industry that share the same or highly

similar competitive attributes. *hese attributes include pricing practices, level of

technology investment and leadership, product scope and scale capabilities, and

product 7uality. $y identifying strategic groups, analysts and managers are better ableto understand the different types of strategies that multiple firms are adopting within

the same industry.

Strategic Group Maps

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useful way to analyze strategic groups is through the creation of strategic group

maps. Strategic group maps present the various competitive positions that similar

firms occupy within an industry. Strategic group maps are not difficult to create!

however, there are a few simple guidelines managers want to use when developing

them.

a) Identif! "e! Competitive ttri#utes$ #s mentioned previously, many firms share

similar competitive attributes such as pricing practices and product scope. *he

first step in developing a strategic group map is to identify &ey competitive

attributes that logically differentiate firms in a competitive set. *his is not

always &nown in advance of creating the map so it is important to be ready to

create multiple maps using different variables.

#) Create Map %ased &pon 'o "e! ttri#ute aria#les$ +or the variables selected,

assign each variable to the K and G ais, respectively. #lso, select a logical

gradation value for each ais so that differences will be readily observable.

6hen complete, plot each firm’s location on the map for the industry beinganalyzed. #s each firm is plotted use a third variableLsuch as revenueLto

represent the actual plot size of each firm. 9sing a variable li&e revenue helps

the reader understand the relative performance of each firm in terms of the

third variable.

c) Identif! Strategic Groups$ /nce all of the firms have been plotted, enclose each

group of firms that emerges in a shape that reflects the positioning on the

strategic group. #t this point, assess whether or not the differences between

each group are meaningful or whether other variables must be selected from

which another set of strategic groups can be drawn.

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*he above is an eample of a strategic group map for the retail %ndustry. Strategic

group creation and analysis provides an effective way to develop a clearer

understanding of how firms within an industry compete. Since each strategic group

depicts firms with similarLif not identicalLcompetitive attributes within the industry,

the map helps managers identify important differences among competitive positions.

*hese differences can be subject to further analysis to helps eplain more subtle

differences in performance.

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C%M'ETITI0E C-ANGES D!RING IND!STR5 E0%L!TI%N

%ndustry lifecycle comprises four stages including fragmentation, growth, maturity

and decline. #n understanding of the industry lifecycle can help competing

companies survive during periods of transition. Several variations of the lifecycle

model have been developed to address the development and transition of products,

mar&et and industry. *he models are similar but the number of stages and names of

each may differ. "ajor models include those developed by +o (>MN), 6asson

(>MNE), #nderson Deithaml (>MOE), and ill Pones (>MMO).

a( "rag*entation Stage

+ragmentation is the first stage of the new industry. *his is the stage when the new

industry develops the business. #t this stage, the new industry normally arises when

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threat created a new business opportunity in the industry for Fic ;ite to launch a

new nicotine-related product called Fic *ime.

Fic *ime is a whole new way for smo&ers to 0get a cigarette0 B an eight-ounce bottle

contains a lemon-flavoured drin& laced with nicotine, the same amount of nicotine as

two cigarettes. Fic ;ite was first available at ;os #ngeles airports for smo&ers who

got uneasy on flights, but now the nicotine soft drin&s are available in some

convenience stores.

c( Matrity

"aturity is the third stage in the industry lifecycle. "aturity is a stage at which the

efficiencies of the dominant business model give these organisations competitive

advantage over competition. *he competition in the industry is rather aggressive

because there are many competitors and product substitutes. 'rice, competition, and

cooperation ta&e on a comple form. Some companies may shift some of the

production overseas in order to gain competitive advantage.

+or eample, *oyota is one of the world4s leading multinational companies, sellingautomobiles to customers worldwide. *he eport and import taes mean that its cars

lose competitiveness to the local competitors, especially in the 5uropean automobile

industry. #s a result, *oyota decided to open a factory in the 9H in order to produce

cars and sell them to customers in the 5uropean mar&et.

*he haute couture fashion industry is another good eample. *here are many

western-branded fashion labels that manufacture their products overseas by

cooperating with overseas partners, or they could see& foreign suppliers who

specialise in particular materials or items. +or instance, Fi&e has factories in China

and *hailand as both countries have cheap labour costs and cheap, 7uality materials,particularly rubber and fabric. owever, their overseas partners are not allowed to

sell shoes produced for #didas and Fi&e. *he items have to be shipped bac& to the

9S, and then will be eported to countries worldwide, including China and *hailand.

$( Decline

ecline is the final stage of the industry lifecycle. ecline is a stage during which a

war of slow destruction between businesses may develop and those with heavy

bureaucracies may fail. %n addition, the demand in the mar&et may be fully satisfied

or suppliers may be running out.

%n the stage of decline, some companies may leave the industry if there is no

demand for the products or services they provide, or they may develop new products

or services that meet the demand in the mar&et. %n such cases, this will create a

new industry.

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+or eample, at the beginning of the communication industry, pagers were used as

the main communication method among people wor&ing in the same organisation,

such as doctors and nurses. *hen, the cutting edge of the communication industry

emerged in the form of the mobile phone. *he communication process of pagers

could not be accomplished without telephones. *o send a message to another pager,

the user had to phone the call-centre staff who would type and send the message to

another pager. /n the other hand, people who use mobile phones can ma&e a

phone-call and send messages to other mobiles without going through call-centre

staff.

%n recent years, the features of mobile phones have been developing rapidly and

continually. Fow people can use mobiles to send multimedia messages, ta&e

pictures, chec& email, surf the internet, read news and listen to music. #s mobile

phone feature development has reached saturation, thus the new innovation of

mobile phone technology has incorporated the use of computers.

*he launch of personal digital assistants ('#) is a good eample of the declinestage of the mobile phone industry as the features of most mobiles are similar. '#s

are hand-held computers that were originally designed as a personal organiser but it

become much more multi-faceted in recent years. '#s are &nown as poc&et

computers or palmtop computers. *hey have many uses for both mobile phones and

computers such as computer games, global positioning system, video recording,

typewriting and wireless wide-area networ&.

Application of in$stry life cycle

%t is important for companies to understand the use of the industry lifecycle becauseit is a survival tool for businesses to compete in the industry effectively and

successfully. *he main aspects in terms of strategic issues of the industry lifecycle

are described below:

Co*peting over e*erging in$stries

• *he game rules in industry competition can be undetermined and the

resources may be constrained. *hus, it is vital for firms to identify mar&et

segments that will allow them to secure and sustain a strong position within

the industry.

• *he product in the industry may not be standardised so it is necessary for

companies to obtain resources needed to support new product development

and rapid company epansion.

• *he entry barriers may be low and the potential competition may be high,

thus companies must adapt to shift the mobility barriers.

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• Consumers may be uncertain in terms of demand. #s a result, determining

the time of entry to the industry can help companies to ta&e business

opportunities before their rivals.

Co*peting $ring t#e transition to in$stry *atrity

• 6hen competition in the industry increases, firms can have a sustainable

competitive advantage that will provide a basis for competing against other

companies.

• *he new products and applications are harder to come by, while buyers

become more sophisticated and difficult to understand in the maturity stage

of the industry lifecycle. *hus, consumer research should be carried out and

this could help companies in building up new product lines.

• Slower industry growth constrains capacity growth and often leads to reduced

industry profitability and some consolidation. *herefore, companies can focus

greater attention on costs through strategic cost analysis.

• *he change in the industry is rather dynamic, and an understanding of theindustry lifecycle can help companies to monitor and tac&le these changes

effectively. +irms can develop organisational structures and systems that can

facilitate the transition.

• Some companies may see& business opportunities overseas when the

industries reach the maturity stage because during this stage, the demand in

the mar&et starts to decline.

Co*peting in $eclining in$stries

*he characteristics of declining industries include the following:

• eclining demand for products

• 'runing of product lines

• Shrin&ing profit margins

• +alling research and development advertisement ependiture

• eclining number of rivals as many are forced to leave the industry

+or companies to survive the dynamic environment, it is necessary for them to:

• "easure the intensity of competition

• #ssess the causes of decline

•

Single out a viable strategy for decline such as leadership, li7uidation andharvest.

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IND!STR5 STR!CT!RE

%ndustry is a collection of firms offering goods or services that are close substitutes of

each other. #n %ndustry consists of firms that directly compete with each other.

%ndustry structure refers to the number and size distribution of firms in an industry.

*he number of firms in an industry may run into hundreds or thousands. *he size

distribution of the

+irm is important from both business policy and public policy views. *he level of

competition in an industry rises with the number of firms in the industry.

i( "rag*ente$ In$stry

%f all firms in an industry are small in size when compared with the size of the whole

industry, then it is &nown as fragmented industry. %n a fragmented industry, no

+irms have large mar&et. 5ach firm serves only a small piece of total mar&et in

competition with others.

ii( Consoli$ate$ In$stry

%f small number of firms controls a large share of the industry4s output or sales, it is&nown as a consolidated industry.

C-ARACTERISTICS %" IND!STR5 STR!CT!RE

# final dimension of industry that is important to the performance of new firms is

industry structure. *he structure of the industry refers to the nature of barriers to

entry and competitive dynamics in the industry.

+our characteristics of industry structure are particularly important to the performance

of new firms in the industry: Capital %ntensity

#dvertising %ntensity

Concentration

#verage firm size

Capital Intensity 9 measures the importance of capital as opposed to labor in the

production process. Some industries, such as aerospace, involve a great deal of

capital and relatively little labor. /ther industries, such as tetiles, involve relatively

little capital and a great deal of labor.

A$vertising Intensity 9 #dvertising is a mechanism through which companies

develop the reputations that help them sell their products and services. *o build brand

name reputation through advertising, two conditions need to be met. +irst, the

advertising has to be repeated over time. Second, economies of scale eist in

advertising.

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Concentration 9 is a measure of the mar&et share that is held by the largest

companies in an industry. +or instance, some pharmaceutical industries li&e "erc&,

'fizer and 5li ;illy account for almost all of the mar&et.

Average fir* si1e 2 Few firms perform better, when the average firm size is small.

Few firms tend to begin small as a way to minimize the ris& of 5ntrepreneurial

miscalculation. %f the average firm size is large, this may lead to %nability to purchase

in volume, higher average manufacturing and istribution cost.

!SES %" IND!STR5 STR!CT!RE

⇒ Bsiness 'olicy an$ Strategy: $y loo&ing at the structure of an industry, one

can often learn a lot about competition, rivalry, entry barriers, and other

aspects of competitive dynamics in that industry.

⇒ ')lic 'olicy: 'ublic 'olicy ATI%N

1lobalisation is the term to describe the way countries are becoming more

interconnected both economically and culturally. *his process is a combination of

economic, technological, socio-cultural and political forces.

AD0ANTAGES

%ncreased free trade between nations

%ncreased li7uidity of capital allowing investors in developed nations to

invest in developing nations

Corporations have greater fleibility to operate across borders

1lobal mass media ties the world together.

%ncreased flow of communications allows vital information to be sharedbetween individuals and corporations around the world

1reater ease and speed of transportation for goods and people.

eduction of cultural barriers increased the global village effect

Spread of democratic ideals to developed nations.

1reater interdependence of nation states.

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eduction of li&elihood of war between developed nations

%ncreases in environmental protection in developed nations

DISAD0ANTAGES

%ncreased flow of s&illed and non-s&illed jobs from developed to developing

nations as corporations see& out the cheapest labor. Spread of a materialistic lifestyle and attitude that sees consumption as the

path to prosperity

%nternational bodies li&e the world trade organization infringe on national

and individual

1reater ris& of diseased being transported unintentionally between nations.

1reater chance of reactions for globalization being violent in an attempt to

preserve cultural heritage.

%ncreased li&elihood of economic disruptions in one nation effecting all

nations.

*hreat that control of world media by a handful of corporations will limit

cultural epression.

*a&e advantage of wea& regulatory rules in developing countries.

%ncrease in the chances of civil war within developing countries and open

war between developing countries as they vie for resources.

ecrease in environmental integrity as polluting corporations.

I*pact of glo)ali1ation on in$stry strctre

*he structure of an industry is affected by globalization. 1lobalization gave rise to the

following types of industries.

"ultidomestic %ndustries

1lobal %ndustries

Mlti$o*estic In$stries are specific to each country or group of countries. *his

type of international industry is a collection of essentially domestic industries li&e

retailing, insurance and ban&ing. %t has manufacturing facility to produce goods for

sale within their country itself.

Glo)al In$stries operate world wide, with "FCs ma&ing only small adjustments for

country- specific circumstances. # global industry is one in which a "FCs activities in

one country are significantly affected by its activities in other countries. "FCs produce

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products or services in various locations throughout the world and sell them, ma&ing

only minor adjustments for specific country re7uirements.

E4: Commercial #ircrafts, *elevision sets, Semiconductors, copiers, automobiles,

watches and tyres.

NATI%NAL C%NTE;T AND C%M'ETITI0E AD0ANTAGE:

espite the globalization of production mar&ets, many of the most successful

companies in certain industries are still clustered in a small number of countries.

$iotechnology computer companies B 9.S.

5lectronics Company B Papan.

Chemical 5ngineering company B 1ermany.*his suggests that the nation B state within which a company is based may

have an important bearing on the competitive position of that company in the global

mar&et place.

Companies need to understand how national factors can affect competitive

advantage, for then they will able to identify.

a. 6here their most significant competitors are li&ely to come from.

b. 6here they might want to locate certain productive activities.

Attri)tes to i$entify National Environ*ent:

>. +actor 5ndowments:

# nation’s position in factors of production such as s&illed labor or the

infrastructure necessary to compete in a given industry.

@. emand Conditions:

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*he nature of home demand for the industry’s product or service.

. elating Supporting %ndustries:

*he presence or absence in a nation of supplier industries and related industries

that is internationally competitive.

E. +irm Strategy, Structure ivalry:

*he conditions in the nation governing how companies are created, organized

and managed and the nature of domestic rivalry.

C%M'ETITI0E AD0ANTAGE:

Competitive advantage leads to superior profitability. #t the most basic level,

how profitable a company becomes depends on three factors:

>. *he amount of value customers place on the company’s product.

@. *he price that a company charges for its products.

. *he cost of creating that value.

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ii) istinctive competency: %t is a competitively valuable activity that a firm

performs better than its competitors. *hese provide the basis for competitive

advantage. *hese are cornerstone of strategy. *hey provide sustainable

competitive advantage because these are hard to copy.

GENERIC B!ILDING BL%CS %" C%M'ETITI0E AD0ANTAGE

/rganizations today confront new mar&ets, new competition and increasing customer

epectations. *hus today4s organizations have to constantly re-engineer their business

practices and procedures to be more and more responsive to customers and

competition. %n the >MM?4s %nformation technology and $usiness 'rocess re-

engineering, used in conjunction with each other, have emerged as important toolswhich give organizations the leading edge. *he efficiency of an enterprise depends on

the 7uic& flow of information across the complete supply chain i.e. from the customer

to manufacturers to supplier. *he generic building bloc&s of a firm to gain competitive

advantage are- Quality, 5fficiency, %nnovation and Customer responsiveness.

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A) EFFICIENC 9 %n a business organization, inputs such as land, capital, raw

material managerial &now-how and technological &now-how are transformed into

outputs such as products and services. 5fficiency of operations enables a company to

lower the cost of inputs to produce given output and to attain competitive advantage.

5mployee productivity is measured in terms of output per employee.

"or e4: Papan’s auto giants have cost B based competitive advantage over their

near rivals in 9.S.

!) "#A$IT 9 Quality of goods and services indicates the reliability of doing the job,

which the product is intended for. igh 7uality products create a reputation and brand

name, which in turn permits the company to charge higher price for the products.

igher product 7uality means employee’s time is not wasted on rewor&, defective

wor& or substandard wor&.

"or e4: %n consumer durable industries such as miers, grinders, gas stoves

and water heaters, %S/ mar& is a basic imperative for survival.

C) INN%ATI%N B %nnovation means new way of doing things. %nnovation results in

new &nowledge, new product development structures and strategies in a company. %t

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offers something uni7ue, which the competitors may not have, and allows the

company to charge high price.

"or e4: 'hotocopiers developed by Kero.

') C#ST%(E ESP%NSIENESS B Companies are epected to provide customers

what they are eactly in need of by understanding customer needs and desires.

Customer esponsiveness is determined by customization of products, 7uic& delivery

time, 7uality, design and prompt after sales service.

"or e4: *he popularity of courier service over %ndian postal service is due to

the fastness of service.

DISTINCTI0E C%M'ETENCIESDistinctive co*petence is a uni7ue strength that allows a company to achieve

superior efficiency, 7uality, innovation and customer responsiveness. %t allows the firm

to charge premium price and achieve low costs compared to rivals, which results in a

profit rate above the industry average.

E4: *oyota with world class manufacturing process.

%n order to call anything a distinctive competency it should satisfy conditions,

namely:

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esources B # resource in an asset, competency, process, s&ill or

&nowledge. esources may be tangible B land, buildings, '" or intangible B

brand names, reputation, patens, &now-how and . # resource is a

strength which the co with competitive advantage and it has the potential to

do well compared to its competitors.

Resorces are the firm-specific assets useful for creating a cost or differentiation

advantage and that few competitors can ac7uire easily. *he following are some

eamples of such resources:

• 'atents and trademar&s

• 'roprietary &now-how

• %nstalled customer base

• eputation of the firm

• $rand e7uity.

*he strengths and wea&nesses of resources can be measured by,

• Company’s past performance

• Company’s &ey competitors and

• %ndustry as a whole.

*he etent to which it is different from that of the competitors, it is considered as a

strategic asset.

Evalation of .ey resorces

# uni7ue resource is one which is not found in any other company. # resource is

considered to be valuable if it helps to create strong demand for the product.

$arney has evolved


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Capa)ilities refer to the firm4s ability to utilize its resources effectively. #n eample

of a capability is the ability to bring a product to mar&et faster than competitors. Such

capabilities are embedded in the routines of the organization and are not easily

documented as procedures and thus are difficult for competitors to replicate.

D!RABILIT5 %" C%M'ETITI0E AD0ANTAGE

urability of competitive advantage refers to the rate at which the firm’s capabilities

and resources depreciate or become obsolete. %t depends on three factors:

#) $arriers to %mitation:

$arriers are factors which ma&e it difficult for a competitor is copy a company’s

distinctive competencies. *he longer the period for the competitor to imitate the

distinctive competency, the greater the opportunity that the company has to build a

strong mar&et positioned reputation with consumers. %mitability refers to the rate atwhich others duplicate a firm underlying resources and capabilities.

*angible resources can be easily imitated but intangible resources cannot be imitated

and capabilities cannot be imitated.

$) Capability of Competitors:

6hen a firm is committed to a particular course of action in doing business and

develops a specific set of resources and capabilities, such prior commitments ma&e it

difficult to imitate the C# of successful firms.

# major determinant of the capability of competitors to imitate a

company’s competitive advantage rapidly is the nature of the competitor’s prior

strategic commitments #bsorptive capacity.

i) Strategic commitment:

# company’s commitment to a particular way of doing business that is to

developing a particular set of resources capabilities.

ii) #bsorptive capacity:

efers to the ability of an enterprise to identify value, assimilate, and use

new &nowledge.

C) ynamism of industry: ynamic industries are characterized by high rate of

innovation and fast changes and competitive advantage will not last for a long time.

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*he most dynamic industries tend to be those with a very high rate of product

innovation.

E4: Computer industry.

A0%IDING "AIL!RE AND S!STAINING C%M'ETITI0E AD0ANTAGE

6hen a company loses its competitive advantage, its profitability falls.

*he company does not necessarily fail, it may just have average or below-average

profitability and can remain in this mode for a considerable time, although its

resources capital base is shrin&ing.

Reasons for failre:

a) Inertia**he %nertia argument says that companies find it difficult to change their

strategies structures in order to adapt to changing competitive conditions.

b) +rior strategic commitments:

# company’s prior strategic commitment not only limits its ability to imitate

rivals but may also cause competitive disadvantage.

c) 'he Icarus +aradox*

#ccording to "iler, many companies become so dazzled by their early success

that they believe more of the same type of effort is the way to future success. #s a

result, they can become so specialized and inner directed that they lose sight of mar&et realities and the fundamental re7uirements for achieving a competitive

advantage. Sooner or later, this leads to failure.

Steps to Avoi$ "ailre:

a) Focus on the %uilding %loc,s of competitive advantage:

"aintaining a competitive advantage re7uires a company to continue focusing

on all four generic building bloc&s of competitive advantage B efficiency, 7uality,

innovation, and responsiveness to customers and to develop distinctive competencies

that contribute to superior performance in these areas.

b) Institute continuous Improvement - .earning:

%n such a dynamic and fast B paced environment, the only way that a company

can maintain a competitive advantage overtime is to continually improve its efficiently,

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7uality innovation and responsiveness to customer. *he way to do this is recognize the

importance of learning within the organization.

c) 'rac, %est Industrial +ractice and use %enchmar,ing:

$enchmar&ing is the process of measuring the company against the products,

practices and services of some of its most efficient global competitors.

d) Overcome Inertia*

/vercoming the internal forces that are a barrier to change within an

organization is one of the &ey re7uirements for maintaining a competitive advantage.

/nce this step has been ta&en, implementing change re7uires good leadership, the

judicious use of power and appropriate changes in organizational structure control

systems.

!NIT 2 III STRATEGIES ?@

*he generic strategic alternatives B Stability, 5pansion, etrenchment and

Combination strategies - $usiness level strategy- Strategy in the 1lobal 5nvironment-

Corporate Strategy-


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5nvironmental *hreat and /pportunity 'rofile (5*/') - /rganizational Capability

'rofile - Strategic #dvantage 'rofile - Corporate 'ortfolio #nalysis - S6/* #nalysis -

1#' #nalysis - "c Hinsey4s Ns +ramewor& - 15 M Cell "odel - istinctive

competitiveness - Selection of matri - $alance Score Card-case study.

-IERARC-ICAL LE0ELS %" STRATEG5

Strategy can be formulated on three different levels:

C/'/#*5 ;5


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leadership3. 5ven though the industry was changing 7uic&ly, the company was wor&ing

to avoid the erosion of its mar&et share by jumping into new wireless mar&ets as

7uic&ly as possible. $eing one of the mar&et leaders in this industry would almost

guarantee "otorola enormous future returns.

# Corporation can grow internally by epanding its operations both globally and

domestically, or it can grow eternally through mergers, ac7uisition and strategic

alliances. # *erger is a transaction involving two or more corporations in which stoc&

is echanged, but from which only one corporation survives. "ergers usually occur

between firms of somewhat similar size and are usually 2friendly3. *he resulting firm is

li&ely to have a name derived from its composite firms. /ne eample in the 'harma

%ndustry is the merging of 1lao and Smith&line 6illiams to form 1lao Smith&line. #n

#c7uisition is the purchase of a company that is completely absorbed as an operating

subsidiary or division of the ac7uiring corporation. 5amples are 'rocter 1amble’s

ac7uisition of ichardson-


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#) G%+T, STATEG

#c7uisition usually occurs between firms of different sizes and can be either friendly or

hostile. ostile ac7uisitions are often called ta&eovers. # Strategic #lliances is a

partnership of two or more corporations or business units to achieve strategically

significant objectives that are mutually beneficial. 1rowth is a very attractive strategy

for two &ey reasons.

• 1rowth is based on increasing mar&et demand may mas& flaws in a company

(flaws that would be immediately evident in a stable or declining mar&et. #

growing flow of revenue into a highly leveraged corporation can create a large

amount of organization slac&. (unused resources) that can be used to 7uic&ly

resolve problems and conflicts between departments and divisions. 1rowth also

provides a big cushion for a turnaround in case a strategic error is made. ;arger

firms also have more bargaining power than do small firms and are more li&ely to

obtain support from &ey sta&e holders in case of difficulty.

• # growing firm offers more opportunities for advancement, promotions, andinteresting jobs, growth itself is eciting and ego enhancing for C5/’s. *he

mar&etplace and potential investors tend to view a growing corporation as a winner

or on the move. 5ecutive compensation tends to get bigger as an organization

increases in size. ;arge firms also more difficult to ac7uire than are smaller ones!

thus an eecutive’s job is more secure.

i( C%NCENTRATI%N STRATEG5: %f a company’s current product lines have real

growth potential, concentration of resources on those product lines ma&es sense as

a strategy for growth. *he two basic concentration strategies are vertical growthand horizontal growth. 1rowing firms in a growing industry tend to choose these

strategies before they try diversifications.

ertical groth can be achieved by ta&ing over a function previously provided

by a supplier or by a distributor. *he company, in effect, grows by ma&ing its

own supplies and8or by distributing its own products. *his may be done in order

to reduce costs, gain control over a scarce resource, guarantee 7uality of &ey

input, or obtain access to potential customers.

Eg: enry +ord used internal company resources to build his iver ouge

'lant outside etroit. *he manufacturing process was integrated to the

point that iron ore entered one end of the long plant and finished

automobiles rolled out the other end into a huge par&ing lot.

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Cisco Systems, the ma&er of %nternet ardware, chose the eternal route

to vertical growth by purchasing adiata, %nc., a ma&er of chips sets for

wireless networ&s. *his ac7uisition gave Cisco access to technology

permitting wireless communications at speeds, previously possible only

with wired connections.


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different industries if they want to continue growing. *he two basic diversification

strategies are concentric and conglomerate.

Concentric 'iversification (1elated) into a related industry may be a very

appropriate corporate strategy when a firm has a strong competitive position

but industry attractiveness is low. $y focusing on the characteristics that have

given the company its distinctive competence, the company uses those very

strengths as its means of diversification. *he firm attempts to secure strategic

fit in a new industry where the firm’s product &nowledge, its manufacturing

capabilities, and the mar&eting s&ills it used so effectively in the original

industry can be put to good use.

Conglomerate 'iversification (&nrelated) ta&es place when management

realizes that the current industry is unattractive and that the firms lac&s

outstanding abilities or s&ills that it could easily transfer to related products, or

services in other industries, the most li&ely strategy is conglomeratediversification B diversifying into an industry unrelated to its current one. ather

than maintaining a common threat throughout their organization, strategic

managers who adopt this strategy are primarily concerned with financials

considerations of cash flow or ris& reductions.

!) STA!I$IT STATEGIES

# corporation may choose stability over growth by continuing its current activities

without any significant change in direction. #lthough sometimes viewed as lac& of

strategy, the stability family of corporate strategies can be appropriate for a successfulcorporation operating in a reasonably predictable environment.

-i) Pause.Proceed +it/ Caution Strateg0 9 %n effect, a time out or an

opportunity to rest before continuing a growth or retrenchment strategy. %t is a

very deliberate attempt to ma&e only incremental improvements until a

particular environmental situation changes. %t is typically conceived as a

temporary strategy to be used until the environmental becomes more

hospitable or to enable a company to consolidate its resources after prolonged

rapid growth.

-ii) No C/ange Strateg0 1 %s a decision to do nothing new (a choice to

continue current operation and policies for the foreseeable future). arely

articulated as a definite strategy, a no change strategy’s success depends on a

lac& of significant change in a corporation’s situation. *he relative stability

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created by the firm’s modest competitive position in an industry facing little of

no growth encourages the company to continue on its current course. "a&ing

only small adjustments for inflation in the sales and profit objectives, there are

no obvious opportunities or threats nor much in the way of significant strengths

of wea&nesses. +ew aggressive new competitors are li&ely to enter such an

industry.

-iii) Profit Strateg0 9 %s a decision to do nothing new in worsening situation

but instead to act as though the company’s problems are only temporary. *he

profit strategy is an attempt to artificially support profits when a company’s

sales are declining by reducing investment and short term discretionary

ependitures. ather than announcing the company’s poor position to

shareholders and the investment community at large, top management may be

tempted to follow this very seductive strategy. $laming the compan

Documents

Strategicmanagementfullnotes 4TH SEM