CONCEPT OF

STRATEGIC MANAGEMENT

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 Thinking Strategically:
The Three Big Strategic Questions

1. Where are we now?

2. Where do we want to go?
– Business(es) to be in and
market positions to stake out?
– Buyer needs and groups to
serve?
– Outcomes to achieve?
3. How do we get there?
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 What is
Strategy?
• A company’s strategy consists of the set of competitive
moves and business approaches that management is
employing to run the company
• Strategy is management’s “game plan” to
– Attract and please customers
– Stake out a market position
– Conduct operations
– Compete successfully
– Achieve organizational objectives
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 Why Are Strategies
Needed?
To proactively shape To mould the
how a company’s independent actions and
business will be decisions of managers
conducted and employees into a
coordinated, company-
wide game plan

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 Strategic Management Concept

Competent execution of a well-conceived

strategy is the best test of managerial excellence
and a proven recipe for organizational success!

Good Strategy + Good Strategy Execution =

Good Management

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Strategic Management – Defined

Art & science of formulating,

implementing, and evaluating cross-
functional decisions that enable an
organization to achieve its objectives.
-Fred David

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 Strategic
Company Vision,
Management mission
Process and social
responsibility

Possible?
External
Internal analysis
environment
Desired?
Feedback

Feedback
Strategic analysis and choice

Long-term
Generic and grand strategies
objectives
Short-term objectives; Policies that
Functional tactics
reward systems empower action

Restructuring, reengineering
and refocusing the organization
Legend Strategic control and
Major impact continuous improvement
Minor
impact 7
 The Five Tasks of
Strategic
Management
Task 1 Task 2 Task 3 Task 4 Task 5

Develop a Monitor,
Craft a Implement
Strategic Evaluate,
Set Strategy and
Vision and Take
Objectives to Achieve Execute
and Corrective
Strategy
Mission Action
Objectives

Revise as Revise as Improve/ Improve/ Recycle

Needed Needed Change Change as Needed

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 Process of Strategic
Management

Environmental Strategy Strategy Evaluation and

Scanning Formulation Implementation Control

Feedback

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 What does Strategic Management Include?
• Determining the mission of the company, including broad statement about its
purpose, philosophy and goals.
• Developing a company profile reflecting internal conditions and capabilities.
• Assessment of the company’s external environment in terms of both competitive
advantage and general contextual factors.
• Analysis of possible options uncovered in matching the company with the
external environment.
• Identifying desired options in light of the company mission.
• Strategic choice of a particular set of long-term objectives and grand stretegies
needed to achieve the desired options.
• Development of annual objectives and short-term strategies compatible with
long-term objectives and grand strategies.
• Implementing strategic choice based on budgeted reeource allocations and
matching of tasks, people, structures, technologies and reward system.
• Review and evaluation of the success of strategic process that serves as a basis
for control
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 Dimensions of Strategic Decisions
• Strategic Issues require Top-management decisions.
• Strategic Issues involve the allocations of large amount of
company resources.
• Strategic Issues are likely to Have a Significant Impact on
the Long-term Prosperity of the firm.
• Strategic Issues are Future Oriented.
• Strategic Issues Usually have Major Multifunctional or
Multibusiness Consequences.
• Strategic Issues Necessitate Considering Factors in the
Firm’s External Environment.

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 Levels of Strategy
• Corporate Level:
– Composed of members of BOD’s, Directors, and CEO’s.
– Responsible for financial/non-financial performance. E.g. corporate
image and social responsibility.
– Generally determine the business in which the company should be
involved.
– Identify distinctive competitiveness or competencies by adopting
portfolio approach.
– Orientations at the corporate level reflect the concern of stockholders
and society at large.
• Business Level:
– Composed of business and corporate managers.
– Translate general statements of directions and intent to concrete
functional objectives and strategies.
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– Determine the basis of competition on selected market.
 Levels of Strategy (contd..)
• Functional Level:
• Composed of managers of product, geographic, and functional
areas
• Develop annual objective and short-term strategies in such
• areas.
Have greatest responsibility in implementing and executing
• company’s strategic plans.
Corporate level emphasizes on “doing the right things” whereas
• functional level emphasize on “doing things right.”
• Addresses ‘efficiency’ and effectiveness of functional tasks.
Directly addresses the efficiency and effectiveness of production
and marketing systems, the quality and extent of customer service,
and the success of particular products and services in increasing the
market share.
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 Characteristics of Strategic
Management Decisions
• Features at Corporate Level:
• Corporate level decisions tend to be value oriented, conceptual and less
concrete than those at business level and functional level.
• Are characterized by greater risk, cost and profit potentials.
• Longer-time horizons and greater needs for flexibility.
• Examples of decisions include choice of business, dividend policies, sources of
long-term financing and priorities for growth.
• Features at Functional Level:
• Involve action-oriented operational issues.
• Are made periodically and leads to the implementation of some part of overall
strategy.
• Relatively short-range and involve low risk and modest cost/ dependent on
available resources.
• Are concrete and quantifiable and adaptable to ongoing activities.
• E.g. brand-name labeling, R&D applications, Inventory levels etc. 14
 Characteristics of Strategic
Management Decisions
•
(contd..)
Features at Business Level:
• Less costly and risky and potentially profitable than corporate level
but more costly and risky than functional level.
• Decisions involve plant location, market segmentation, geographic
coverage, distribution channel decisions.

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 Formality in Strategic Management
• Formality refers to the degree to which membership, responsibilities,
authority, and discretion in decision making are specified.
• An important consideration because degree of formality is usually
positively correlated with cost, comprehensiveness, accuracy and
success of planning.
• The size of the organization, its predominant management styles, the
complexity of its environment, its production processes, the nature of
its problems, and the purpose of its planning system all combine in
determining an appropriate degree of formality.
• Formality is often associated with two factors: size and stage of
development of the company.
• Entrepreneurial Mode – most small firms
• Planning Mode – most large firms
• Adaptive Mode – most medium size firms
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Benefits of Strategic Management

Financial Benefits

• Improvement in sales
• Improvement in profitability
• Productivity improvement

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Benefits of Strategic Management

Non-Financial Benefits

• Improved understanding of competitors strategies

• Enhanced awareness of threats
• Reduced resistance to change
• Enhanced problem-prevention capabilities

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 The Strategy Makers/Role of Chief Executive in
Strategic Management
• Ideally strategic management process is developed and governed by
a team which comprises of CEO’s, the business/product managers,
and the heads of the functional areas.
• Because of the tremendous impact and large commitments of
company resources strategy can only be made by top managers.
• Top management shoulders the responsibility for approving phases
of planning.
• Business level particularly have principal responsibilities for
approving environmental analysis and forecasting.
• Top management also reviews, evaluates, and counsels on most
major phases of the strategic plan’s preparation.

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 Role of CEO
• CEO’s must give long-term direction to the firm.
• Personalities of CEO’s often affect in delegating substantive
authority in formulation and execution of strategies.
• Autocratic CEO reduces the firms effectiveness on strategic
decisions and planning.
• Team-oriented and participative CEO increases the efficiency of
strategic management processes.
• CEO’s must provide managers at all levels with an opportunity to
play a role in strategic decision process.
• CEO’s fulfillment of promise is parallel to the degree of success
enjoyed by a firm.

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 What Makes Strategy a Winner?
1. How well does the strategy fit the company’s situation?
2. Is the strategy helping company achieve a sustainable
competitive advantage?
3. Is strategy resulting in better performance?
– Better performance resulting from financial gains and
strengths and
– Better performance by gains in competitive strength and
market standings.

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ENVIRONMENTAL
ANALYSIS

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Environmental Analysis

• Starting point in strategic Management Process

• General environment and Industry environment
analysis is required to scan the environment and
analyze competition in the industry.
• Firm’s internal environment analysis helps to
identify strength and weakness.

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Firm’s External Environment

• Economi Remote Environment (Global and Domestic) • Technological

c • Ecological
• Social
• Political
Industry Environment (Global and Domestic)
• Entry barriers •Buyer power
•Competitive
• Supplier power •Substitute availability rivalry
Operating Environment (Global and Domestic)

• Competitor • Labor
• Suppliers
s
• Creditors THE FIRM • Customers

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Industry and
Competitive
Analysis
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 Industry and Competitive Analysis

Assess Industry & Competitive Conditions

1. Industry’s dominant economic traits

2. Nature of competition & strength of
competitive forces (Five force Model)
3. Drivers of industry change
4. Competitive position of rivals
5. Strategic moves of rivals
6. Key success factors Identify Select
7. Conclusions about industry Strategic the Best
attractiveness
Options Strategy
for the for the
Assess Company Situation Company Company
1. Assessment of company’s present strategy
2. Resource strengths and weaknesses,
market opportunities, and external threats
3. Company’s costs compared to rivals
4. Strength of company’s competitive
position
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5. Strategic issues that need to be
addressed
1. Industry’s dominant Economic Traits
• Market Size and Growth
• Scope of competitive rivalry
• Number of rivals
• Production capacity
• Buyer need and requirement
• Product differentiation
• Learning and experience curve effect
• Pace of technological change
• Product innovation

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 Five Force Model Of Competition

Potenti
al
Entrants
Threat of new
entrants
Bargaining Bargaining
power of power of
Industry Competitors
suppliers buyers

Suppliers Buyers

Rivalry
Among
Threat of substituteExisting
products or Firms
services
Substitutes

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Threat of new entry
• Seriousness of threat depends on
• Barriers to entry
• Reaction of existing firms
• Barriers to entry
• Economies of scale
• Product differentiation
• Capital requirements
• Cost advantages independent of size
• Access to distribution channels
• Government policy

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Bargaining Power of Suppliers
A supplier group is powerful if:
• It is dominated by a few companies and is more
concentrated than industry it sells to
• Its product is unique, or differentiated, or has built up
switching costs
• It is not obliged to contend with other products for
sale to industry
• It poses a threat of integrating forward into industry’s
business
• Industry is not an important customer of supplier
group

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Bargaining Power of Buyers

A buyer group is powerful if:

• It is concentrated or purchases in large volume
• Products purchased from industry are standard or
undifferentiated
• Products purchased from industry form a component of its
product, representing a significant fraction of its cost
• It earns low profits, creating incentives to lower its costs
• Industry’s product is unimportant to quality of buyers’ products or
services
• Industry’s product does not save buyer money
• Buyer poses credible threat of integrating backward

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Threat of Substitute Products
• Relevance of substitutes
• By placing a ceiling on prices charged, they limit profit
potential of an industry
• Substitutes deserving the most attention are
those
• Subject to trends improving their price-performance
trade-off with the industry’s product
• Produced by industries earning high profit

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Competitive Position
Tactics of competitive rivalry
• Price competition
• Product introduction
• Advertising slugfests

What makes the competition intense?

• Numerous competitors or they are roughly equal in size and power
• Slow growth in industry
• Product lacks differentiation or switching costs
• High fixed costs or perishable product
• Capacity normally augmented in large increments
• High exit barriers
• Rivals are diverse in strategies, origins, and
“personalities”
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Industry’s Driving Force
• Internet and e-commerce opportunities
• Increasing globalization of industry
• Changes in long-term industry
growth rate
• Changes in who buys the product
and how they use it
• Product innovation
• Technological change/process
innovation
• Marketing innovation 34
Competitive Position of Rival Firms
• One technique for revealing the different competitive
positions of industry rivals is strategic group
• mapping
A strategic group consists of those rivals with similar
• competitive approaches in an industry
Firms in same strategic group have two or more
competitive characteristics
– Sell in same in common
price/quality range
– Cover same geographic areas
– Be vertically integrated to same degree
– Have comparable product line breadth
– Emphasize same types of distribution channels
– Offer buyers similar services
– Use identical technological approaches

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 Example: Strategic Group Map of
the Video Game Industry
Arcades
Suppliers/Distribution Channels

Arcade
operators Publishers
Types of Video Game

Home PCs of games on

CD-ROMs
Sony, Sega,
Nintendo, several
Video game others
consoles

MSN Gaming Zone,

Online/Internet Pogo.com,
America Online,
HEAT, Engage,
Oceanline, TEN

Low Medium High

(Coin-operated (Console players cost (Use PC)
equipm $100-
ent) Overall Cost to Players
$300) of Video Games
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 5. Competitive Moves of Rivals

• A firm’s own best strategic moves are

affected by
– Current strategies of competitors
– Future actions of competitors
• Profiling key rivals involves gathering
competitive intelligence about their
– Current strategies
– Most recent moves
– Resource strengths and weaknesses
– Announced plans 37
 6. KEY SUCCESS FACTORS IN THE INDUSTRY
• Answers to three questions pinpoint KSFs
– On what basis do customers choose between
competing brands of sellers?
– What resources and competitive capabilities
does a seller need to have to be competitively
successful?
– What does it take for sellers to achieve a
sustainable competitive advantage?
• KSFs consist of the 3 - 5 really major
determinants of financial and
competitive success in an industry

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 Example: KSFs for Beer
Industry
• Utilization of brewing capacity -- to keep
manufacturing costs low
• Strong network of wholesale distributors --
to gain access to retail outlets
• Clever advertising -- to induce beer drinkers
to buy a particular brand

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7: Is the Industry Attractive/Unattractive
(Why?)
Objective
Develop conclusions about whether the industry
and competitive environment is attractive or
unattractive, both near- and long-term, for
earning good profits

Principle
A firm uniquely well-suited in an otherwise
unattractive industry can, under certain
circumstances, still earn unusually good profits
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Operating Environment
The operating environment, also called the competitive
or task environment, comprises factors in the
competitive situation that affect a firm’s success in
acquiring needed resources or in profitably marketing its
goods and services.

Factors in the operating environment

• Firm’s competitive position
• The composition of its customers
• Its reputation among suppliers and creditors
• Its ability to attract capable employees

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Criteria Used in Constructing

Competitor Profiles

• Market share • Financial position

• Breadth of product line • Relative product quality
• Effectiveness of sales • R&D advantages position
• distribution • Caliber of personnel
Proprietary and key-account • General images
• advantages • Customer profile
• Price competitiveness • Patents and
Advertising and promotion • copyrights Union
• effectiveness • relations
• Location and age of • Technological position
• facility Capacity and Community reputation
• productivity Experience
Raw material costs
Customer Profile
• Improves ability of managers to
• Plan strategic operations
• Anticipate changes in size of markets
• Reallocate resources to support forecasted shifts in demand
patterns
• Two approaches to market segmentation
• Traditional segmentation approach (for consumer market)
Geographical: County, region, city, density, climate
Psychographic: Life style, personality, social class
Demographic: age, sex, family size, income,
occupation, education, religion etc.
Behavioral: Occasions; Benefits; User status; Usage rate;
Loyalty status; Readiness stage; Attitude toward product

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Industrial market segmentation
Demographic :
Industry; Company size; Location
Operating:
Technology; User-nonuser status; Customer capabilities
Purchasing Approaches:
Purchasing-function organization; Power structure;
Nature of existing relationships; General purchase
policies; Purchasing criteria
Situational Factors:
Urgency; Specific application; Size of order
Perfect Characteristics:
Buyer-seller similarity; Attitudes toward risk; Loyalty
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Factors Related to Assessing

Relationship With Suppliers
How costly are shipping charges? Are
suppliers competitive in terms of
production standards?

Are suppliers’ prices Are suppliers reciprocally

competitive? Do they offer dependent on the firm?
quantity discounts?

In terms of deficiency rates, are

suppliers’ abilities, reputations,
and services competitive?
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Factors Related to Assessing

Relationship with Creditors
• Do creditors fairly value and willingly accept
firm’s stock as collateral?
• Do creditors perceive firm as having an
acceptable record of past payment?
• A strong working capital position? Little or
no leverage?
• Are creditors’ loan terms compatible with
firm’s profitability objectives?
• Are creditors able to extend necessary lines
of credit?
 Factors Related to Acquiring Needed
Human Resources
Reputation as an
employer

A firm’s access to
Local employment needed Availability of people
rates personnel is affected by with needed
skills
Strategy Options and
strategic analysis
and Choice

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Generic Strategies
• Low cost provider strategies
• Broad differentiation strategies
• Best-cost provider strategy
• Focused strategy based on lower cost
• Focused strategy based on differentiation.
Requirement for Generic
Strategies
Generic Commonly Required Skills and Common Organizational
Resources Requirements
Strategy
Overall Cost •Sustained capital investment •Tight cost control
Leadership and access to capital • Frequent,
•Process engineering skills detailed control
•Intense supervision of labor reports
• Products designed for ease • Structured
in manufacture
organization and
•Low-cost distribution system
responsibilities
•Incentives based
on
meeting strict
quantitative targets
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Requirements contd..
Generic Strategy Commonly Required Skills and Common Organizational
resources Requirements

Differentiation •Product engineering •Strong coordination

•Creative flare among functions in
•Strong capability in basic research R&D, product
• Corporate reputation for quality development, and
or technological leadership marketing
•Unique combination of skills •Subjective measurement and
•Strong cooperation from channels incentives instead of
•Strong marketing abilities quantitative measures
•Amenities to attract highly
skilled labor, scientists, or
creative people

Focus Combination of above policies directed at Combination of above policies

the particular strategic target directed at the particular
strategic target

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Types of Grand Strategies

1. Concentrated growth 8. Concentric

2. Market development diversification
3. Product development 9. Conglomerate
4. Innovation diversification
5. Horizontal integration 10.Retrenchment/
6. Vertical integration Turnaround
7. Joint ventures 11.Divestiture
12.Liquidation
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Strategic Analysis and Choice
Input stage:
• Internal Factor Evaluation Matrix (IFE)
• External Factor Evaluation Matrix (EFE)
• Competitive Profile Matrix (CPM)

Matching stage:
• SWOT Matrix
• SPACE Matrix (Strategic Position and Action Evaluation
Matrix)
• GE Matrix

Decision stage:
Quantitative Strategic Planning Matrix (QSPM)
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Strategic Analysis and Choice
Several Factors influence the strategic
choice decisions. Some of the more
important are:
• Role of past strategy
• Degree of firm’s external dependence
• Attitude towards risk
• Internal political situation and the CEO
• Timing
• Competitive reaction.
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Thank You

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