STRATEGIC MANAGEMENT By Prof Mahajan Samant Business and Military Strategy • Strategy from Greek “STRATEGOS”=> Military General. • STRATOS (the army) and AGO (to lead) WEBSTER’s new world Dictionary • “The science of planning and directing large-scale military operations, of maneuvering forces into the most advantageous position prior to actual engagement with the enemy” Integrating Intuition and Analysis • Strategic management process can be described as an objective, logical, systematic approach for making major decisions in organizations WILL DURANT of General Motors • ‘A man who would proceed on a course of action guided solely as far as I could tell, by some intuitive flash of brilliance. He never felt obliged to make an engineering hunt for the facts. Yet at times, he was astoundingly correct in his judgment.’ Alfred Sloan ALBERT EINSTEIN • ‘I believe in intuition and inspiration. At times I feel certain that I am right while not knowing the reason. Imagination is more important than knowledge, because knowledge is limited, whereas imagination embraces the entire world.’ PETER DRUCKER • I believe in intuition only if you discipline it. ‘Hunch’ artists, who make a diagnosis but don’t check it out with facts, are the ones in medicine who kill people, and in management kill businesses’. Ref:- Sun Tzu => “The art of war”=> 15 PRINCIPLES • Know You + Know Enemy=> 100 battles but no defeat! • Know You + Ignorant=> 50:50 Chance • NIL + NIL => Sure defeat in each battle! CHAPTER 1 CRAFTING And EXECUTING STRATEGY 8 THREE KEY ISSUES WHERE ARE WE NOW ? ? WHERE DO WE WANT TO GO ? WILL WE GET THERE ? “STRATEGY” • MANAGEMENT’S GAME PLAN • FOR GROWING THE BUSINESS !?! • FOR ACHIEVING TARGETED OBJECTIVES ! • FOR FUTURE! CHIEF ELEMENTS OF SOUTH WEST AIRLINES STRATEGY • GROW THE BUSINESS BY GRADUALLY ADDING MORE FLIGHTS ON EXISTING ROUTES AND BY INITIATING SERVICE TO NEW AIRPORTS • MAKE FRIENDLY SERVICE A COMPANY TRADEMARK • MAINTAIN AN AIRCRAFT FLEET OF ONLY BOEINGS 737s CHIEF ELEMENTS OF SOUTH WEST AIRLINES STRATEGY • ENCOURAGE CUSTOMERS TO MAKE RESERVATIONS AND PURCHASE TICKETS AT THE COMPANY’S WEB SITE • AVOID FLYING INTO CONGESTED AIRPORTS, STRESSING INSTEAD ROUTES BETWEEN MEDIUM-SIZED CITIES AND SMALL AIRPORTS CLOSE TO MAJOR METROPOLITAN AREAS CHIEF ELEMENTS OF SOUTH WEST AIRLINES STRATEGY • EMPLOY A POINT-TO-POINT ROUTE SYSTEM (AS COMPARED TO HUB-AND-SPOKE SYSTEM OF RIVAL CARRIERS • ECONOMICS ON THE AMOUNT OF TIME IT TAKES TERMINAL PERSONNEL TO CHECK PASSENGERS IN AND ON-LOAD PASSENGERS • ECONOMISE ON COSTS! {SHORT TURN-AROUND TIMES} MOST FREQUENTLY USED!….. FOUR STRATEGIC APPROACHES… • BEING THE INDUSTRY’S LOW-COST PROVIDER (THERE BY GAINING A COST-BASED COMPETITIVE ADVANTAGE)(E.G. WAL-MART, SOUTH WEST) • OUT COMPETING RIVALS BASED ON SUCH DIFFERENTIATING FEATURES AS HIGHER QUALITY. WIDER PRODUCT SELECTION, ADDED PERFORMANCE, BETTER SERVICE, MORE ATTRACTIVE STYLING, TECHNOLOGICAL SUPERIORITY, OR UNUSUALLY GOOD VALUE FOR MONEY. (J & J IN BABY PRODUCT, MERCEDES & BMW IN ENGINEERING DESIGN) MOST FREQUENTLY USED!….. FOUR STRATEGIC APPROACHES… • FOCUSING ON A NARROW NICHE MARKET AND WINNING A COMPETITIVE EDGE BY DOING A BETTER JOB THAN RIVALS OF SERVING THE SPECIAL NEEDS AND TASTES OF NICHE BUYERS. (E.G McAFEE) • DEVELOPING EXPERTISE & RESOURCE STRENGTH THAT GIVES THE COMPANY COMPETITIVE CAPABILITIES THAT RIVALS CAN’T EASILY IMITATE OR TRUMP WITH CAPABILITIES OF THEIR OWN. (E.G FEDEX …NEXT DAY DELIVERY IN SMALL PACKAGES, IBM ..LARGE CORP SUPPORT) STRATEGY IS .. PARTLY PROACTIVE AND PARTLY REACTIVE “STRATEGY” • EMERGES INCREMENTALY AND THEN EVOLVES OVER TIME! • CRAFTING STRATEGY CALLS FOR GOOD ENTREPRENEURSHIP! • STRATEGY & ETHICS : PASSING THE TEST OR MORAL SCRUTINY COMPANY’S STRATEGY AND BUSINESS MODEL • ‘BUSINESS MODEL RELATES TO WHETHER THE REVENUE(OST – PROFIT ECONOMICS OF ITS STRATEGY DEMONSTRATES THE VIABILITY OF THE BUSINESS ENTERPRISE AS A WHOLE E.G. MICROSOFT Vs RED HAT LINUX MICROSOFT Vs RED HAT LINUX • DEVELOP • COLLABORATIVE EFFORT PROPRIETORY CODE OF VOLUNTEER KEEP SOURCE CODE PROGRAMMERS FROM HIDDEN WORLD! • SELL TO P.C. AT ATTRACTIVE PRICES, GET LARGE UNIT SALES • UPFRONT PRODUCTION DEVELOPMENT COSTS! MICROSOFT Vs RED HAT LINUX • MOST COSTS ARE FIXED SINCE FRONT END DEVELOPMENT • PROVIDE SUPPORT AT NO COST • MODEST FEE • RELEASE UPGRADED AT FREQUENCY! • SOURCE CODE OPEN! • SPECIALISED EXPERTISE TRAINING WHAT MAKES A STRATEGY - A WINNER ? • HOW WELL THE STRATEGY FITS THE COMPANY’S SITUATION? • IS THE STRATEGY HELPING THE COMPANY ACHIEVE A SUSTAINABLE COMPETITIVE ADVANTAGE ? • IS THE STRATEGY RESULTING IN BETTER COMPANY PERFORMANCE? WHY ARE CRAFTING AND EXECUTING STRATEGY IMPORTANT ? • THERE IS A COMPELLING NEED FOR MANAGERS TO PROACTIVELY SHAPE OR CRAFT HOW THE COMPANY’S BUSINESS WILL BE CONDUCTED • A STRATEGY-FOCUSED ORGANISATION IS MORE LIKELY TO BE A STRONG BOTTOM-LINE PERFORMER GOOD MANAGEMENT = GOOD STRATEGY + GOOD STRATEGY EXECUTION …………. EXERCISES…………. • www.redhat.com =>Business Model THE MANAGERIAL PROCESS OF CRAFTING & EXECUTING STRATEGY… CHAPTER 2 CRAFTING AND EXECUTING COMPANY STRATEGY • DEVELOPING A STRATEGIC VISION • SETTING OBJECTIVES… YARDSTICK FOR MEASUREMENT • CRAFTING A STRATEGY TO ACHIEVE DESIRED OUTCOME • IMPLEMENTING CHOSEN STRATEGY • MONITORING DEVELOPMENTS & CORRECTIVE ADJUSTMENTS VISION DEVELOPING A STRATEGIC VISION (ROADMAP) • PRODUCT - CUSTOMER - MARKET - TECHNOLOGY • E.G ‘CAR IN EVERY GARRAGE’…HENRY FORD • “WHERE ARE WE GOING AND WHY?” VISION (ROADMAP) A vision or strategic intent is the desired future state of organization. It is an aspiration around which a strategic perhaps a chief executive,might seek to focus the attention and energies of members of the organization. ANSWER THE QUESTION “WHAT DO WE WANT TO BECOME” “Our Vision is to take care of your vision” Stokes Eye Clinic in Florence,South Carolina It refers to category of intentions that are broad ,all inclusive and forward thinking. 30 VISION MOST INTEGRATIVE FEWEST IN NUMBER V VISION MISSION GOALS OBJECTIVES MOST SPECIFIC PLANS 31 GREATEST IN NUMBER MISSION • PRESENT BUSINESS SCOPE AND PURPOSE • WHO WE ARE, WHAT WE DO, WHY WE ARE HERE • DEFINED BY BUYER NEEDS . IT SEEKS TO SATISFY… • (IDENTICAL) BUSINESS PURPOSE (POPULAR TERM) • E.G “ GIVE OUR CUSTOMERS BEST FOOD & BEVERAGE VALUES with WARMTH, FRIENDLINESS, FUN, PRIDE, & CO.SPIRIT …..TRADER JOE’S MISSION MISSION •Of a business is the fundamental unique purpose that sets it apart from other firms of its type and identifies the scope of its operations in product and market terms. •Is a generalized statement of the overriding purpose of the organization. •Enduring statement of purpose that distinguish one business from other similar firms. •It addresses the basic question “What is our business” ? •It describes the values and priorities of an organization. •It compels strategists to think about the natureand scope of present operations and to assess the potential attractiveness of future markets and activities. •To create software for the personal computer that empowers and enriches people in workplace,school and at home. Eg. MICROSOFT •A vision becomes more tangible in the form of a mission statement. 33 LINKING VISION WITH VALUES • VALUES, WE MEAN BELIEFS, BUSINESS PRINCIPLES, PRACTICES INCORPORATED IN THE WAY THE COMPANY OPERATES AND COMPANY PERSONNEL BEHAVE. • VALUES RELATE TO INTEGRITY, ETHICS, INNOVATIVENESS, EMPHASIS ON QUALITY OR SERVICE, SOCIAL RESPONSIBILITY AND COMMUNITY CITIZENSHIP. E.G “ DISCIPLINE, RISK-TAKING, QUALITY, CUSTOMER (INTEL) ORIENTATION, RESULT ORIENTED ATMOSPHERE” CORE VALUES COMMUNICATING THE STRATEGIC VISION • A STONEMASON FINDS BUILDING A MAGNIFICIENT CATHEDRAL MORE INSPIRING THAN LAYING STONES • HENCE COMMUNICATING TO THE LOWER MOSTS! • EXPRESS ESSENCE OF VISION IN SLOGAN • E.G 1. SCOTLAND YARD “TO MAKE LONDON SAFEST IN THE WORLD” • E.G 2. MICROSOFT CORPORATION “ EMPOWER PEOPLE THROUGH GREAT SOFTWARE-ANYTHING, ANY PLACE, AND ON ANY DEVICE.” • BREAKING DOWN RESISTANCE TO A NEW VISION • RECOGNISING STRATEGIC INFLECTION POINTS E.G “ ELECTRICAL AND ELECTRONICS “ …CGL COMMUNICATING THE STRATEGIC VISION • THE PAY OFFS OF A CLEAR VISION STATEMENT •CRYSTALLISES EXECUTIVES’ OWN VIEWS •REDUCES RUDDERLESS DECISION MAKING PAYOFFS OF A CLEAR VISION STATEMENT •WINS SUPPORT FOR INTERNAL CHANGES •DEPARTMENTS FINE TUNE WITH STRATEGY •PREPARES ORGANISATION FOR FUTURE SETTING OBJECTIVES • CONVERSION INTO SPECIFIC PERFORMANCE TARGETS • QUANTIFIABLE, MEASURABLE WITH DEADLINES • ‘YOU CAN NOT MANAGE WHAT YOU CANNOT MEASURE’ ….BILL HEWLETT (HEWLETT PACKARD) • …..PRACTICAL RATIONAL ACHIEVEMENT APPROACH…….. SETTING OBJECTIVES • BALANCED SCORECARD •YARDSTICKS RELATING TO FINANCIAL PERFORMANCE AND STRATEGIC PERFORMANCE E.G % INCREASE IN SALES ROCE OR ROE % INCREASE IN M.S. BRAND NAME APPEALS SETTING OBJECTIVES • E.G 3M CORPORATION •EPS INCREASED BY 10% OR PLUS ANNUAL GROWTH •ON AN AVERAGE, ROE OF 20-25% •ROCE = 27% OR BETTER •MIN 30% SALES FROM NEW PRODUCTS OF 4 YEARS • IMPROVED S.P. FOSTERS BETTER FIN. PERFORMANCE • BALANCED SCORECARD APPROACH FOR TRACKING • NEED FOR BOTH ST & LT OBJECTIVES SETTING OBJECTIVES • CONCEPT OF STRATEGIC INTENT MEANS RELENTLESS PURSUIT • E.G IN 1980, WAL-MART’S S.I ‘TO OVERTAKE SEARS’(IN 1991) • NEED FOR OBJECTIVES AT ALL LEVELS • TOP DOWN (NOT BOTTOM-UP) OBJECTIVE SETTING CRAFTING A STRATEGY • CEO AS CAPTAIN • HEADS OF BUSINESS DIVISIONS /FUNCTIONS • PEOPLE INVOLVEMENT PROCESS..SENSITIVE! • STRATEGY MAKING PYRAMID •CORPORATE STRATEGY •BUSINESS STRATEGY •FUNCTIONAL-AREA WITHIN EACH BUSINESS •OPERATING STRATEGIES WITHIN EACH BUSINESS CRAFTING A STRATEGY • BUSINESS • UNITING THE STRATEGY-MAKING EFFORT FULL POWER IF MANY PIECES OF S ARE UNITED! • MERGING THE STRATEGIC VISION, OBJECTIVES& STRATEGY INTO A STRATEGIC PLAN IMPLEMENTING CHOSEN STRATEGY • DIRECT CHANGE, MOTIVATE, BUILD & STRENGTHEN • STAFFING, BUDGETING • POLICIES, PROCEDURES, RULES • BEST KNOWN PRACTICES • INSTALLING INFORMATION&OPERATING SYSTEM • COMPANY CULTURE & WORK CLIMATE • EXERTING INTERNAL LEADERSHIP • CREATING STRONG FITS BETWEEN STRATEGY AND REST INITIATING CORRECTIVE ADJUSTMENTS INITIATING CORRECTIVE •IF EXTERNAL OR INTERNAL CONDITIONS ADJUSTMENTS WARRANT, CO’S….REVISITED CORPORATE GOVERNANCE ROLE OF BOARD OF DIRECTORS … • BE INQUIRING CRITICS AND OVERSEERS • EVALUATE THE CALIBER OF THE SENIOR EXECUTIVES • INSTITUTE COMPENSATION PLAN FOR THE TOP EXECUTIVES ………EXERCISES…….. •www.heinz.com • READ LETTER TO SHAREHOLDER IN 2003 ANNUAL REPORT BY CEO MR. WILLIAM JOHNSON PERUSAL FOR CRITICAL EXAMINATION ANALYZING A COMPANY’S EXTERNAL ENVIRONMENT CHAPTER 3 THREE CRITERA OF A WINNING STRATEGY 1. Appraisal of company • External and internal situations. 2. Evaluation of most promising strategy options. 3. Choice of a strategy and the business models. RELEVANT COMPONENTS OF EXTERNAL ENVIRONMENT • • • • • S- SOCIAL P- POLITICAL E-ECONOMICS L- LEGAL T-TECHNOLOGY • And such others and any relevant factors • Thinking strategically about a company’s industry and competitive environment. 7 KEY QUESTIONS 1. 2. 3. 4. 5. 6. 7. 8. DOMINANT ECONOMIC FEATURES OF INDUSTRY COMPETETIVE FORCES, INDUSTRY, MEMBERS FACING FORCES DRIVING CHANGES IN INDUSTRY POSITIONS OF INDUSTRY RIVALS LIKELY STRATEGY MOVES OF RIVALS KEY FACTORS OF COMPETITIVE SUCCESS INDUSTRY OUTLOOK SUFFICIENTLY ATTRACTIVE ANSWERS TO ABOVE 7 QS PROVIDE THE DIAGONOSIS OF INDUSTRY AND COMPETETIVE ENVIRONMENT Q1. What are the industry’s dominant economic features? • Market size and growth rate • Scope of competitive rivalry • Number of rivals • Buyer needs and requirements • Production capacity • Pace of technological change • Vertical integration • Product innovation • Degree of product differentiation • Economics of scale • Lerning and experience curve effects Q2. What kind of competitive forces is the industry facing? •“ FORCES MODEL OF COMPETITION” •By Michael E Porter FORCES MODEL OF COMPETITION 1. The rivalry among competing sellers 2. Potential entry of new competitors 3. Competitive pressures of substitute products 4. Pressures from supplier bargaining power 5. Pressures from buyer bargaining power •Hence •Determine whether the collective strengths of 5 competitive forces promote profitability Q3. What factors are driving industry change and what impacts will they have? Concept of driving forces • ‘--- are those that have the biggest influence on what kind of changes will take place in the industry’s structure and competitive environments.---’ • Note: some originate from within the company’s more immediate industry; some originate in company’s microenvironment HENCE ANALYSIS OF 2 STEPS • STEP 1. Identifying an industry’s driving forces • STEP 2. assessing their impact on industry STEP 1:Identifying an industry’s driving forces • 1. •2 •3 •4 •5 •6 •7 •8 Internet technology globalization Industry growth rate User/ usage changes Product innovation techno/ mfg innovation Marketing innovation entry / exit STEP 1:Identifying an industry’s driving forces Contd.. •9 • 10 • 11 • 12 • 13 • 14 • 15 • 16 Cost/ efficiency changes diffusion forces Differentiated products not commodity products Risk / uncertainty reduction regulatory changes lifestyles and attitudes changing society STEP 2.ASSESSING THE IMPACT OF DRIVING FORCES CHECK A) IMPACT ON DEMAND B) IMPACT ON COMPETITION C) IMPACT ON PROFITABILITY Hence, the link between driving forces and technology Q 4. What market positions do rivals occupy ? • WHAT MARKET POSITIONS DO RIVALS OCCUPY • WHO IS STRONGLY POSITIONED AND WHO IS NOT? STRATEGIC GROUP MAPPING(SGM) • ‘--- IS A TECHNIQUE FOR DEPLOYING THE DIFFERENT MARKET OR COMPETITIVE POSITIONS THAT RIVAL FIRMS OCCUPY IN THE INDUSTRY---’ USNG SGM TO ACCESS MARKET POSITIONS • IDENTIFY VARIABLE • PLOT ON TWO VARIABLE MAP • ASSIGN FIRMS • DRAW CIRCLES PROPORTIONAL TO BUSINESS. • E.g. price/ quality V geographic coverage for Gucci, channel fends to walmart kmart. • Hence learning from SGM Q 5- WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE NEXT • Identifying competitors’ strategy on Resource Strength and weaknesses • 1. identifying competitors strategy on resource, strength and weakness. •2 Predicting competitors next moves Q.6 What are the key factors for success? • Technology • Manufacturing • Distribution • Marketing • Skills and capability • Other types • Any • All Q 7. DOES THE OUTLOOK FOR THE INDUSTRY PRESENT AN ATTRACTIVE OPPORTUNITY? • A general preposition • If an industry’s over all profit prospects performance are above average, the industry environment is basically attractive; if below average=- un attractive • NOTE: Important factors could be, • 1. Industry growth potential •2 Future uncertainty •3 Power groups of leaders •4 Issues of industry •5 And such other relevant factors!--- ANALYSING A COMPANIES RESOURCES AND COMPETITIVE POSITION Chapter 4 ANALYTICAL SPOTLIGHT ON 5 QUESTIONS • HOW WELL IS THE COMPANIES PRESENT STRATEGY WORKING ? • WHAT ARE THE COMPANIES SWOT ? • ARE THE PRICES AND COSTS COMPETITIVE ? • IS THE COMPANY COMPETITIVELY STRONGER OR WEAKER ? • WHAT STRATEGIC ISSUES AND PROBLEMS MERIT ATTENTION ? Q1.HOW WELL IS THE COMPANIES PRESENT STRATEGY WORKING • SALES GROWTH • NEW CUSTOMERS • PROFIT INCREASE • ROI TRENDS • CREDIT RATING • IMPROVEMENT • IMAGE AND REPUTATION • PROACTIVE TACTICS MEASURES • SHAREHOLDERS VIEWS • SUCH OTHER Q2 WHAT ARE THE COMPANIES SWOT’S • STRENGTHS EXPERTISE PHYSICAL ASSETS HUMAN RESOURCES INTANGIBLE ASSETS(BRAND) ACHIEVEMENTS ALLIANCES AND VENTURES COMPETENCIES COMPETENCIES • CORE COMPETENCY – IS SOMETHING AN ORGN IS GOOD AT DOING. IS A PROFICIENTLY PERFORMED INTERNAL ACTIVITY THAT IS CENTRAL TO A COMPANIES STRATEGY AND COMPETITIVENESS, KNOWLEDGE BASE RESIDING IN PEOPLE, INTELLECTUAL CAPITAL, NOT ASSETS • DISTINCTIVE COMPETENCIES – IS A COMPETITIVELY VALUABLE ACTIVITY THAT A COMPANY PERFORMS BETTER THAN RIVALS. IT IS A COMPETITIVELY SUPERIOR RESOURCE STRENGTH COMPETITIVE POWER OF RESOURCE STRENGTH • HARD TO COPY – WAL MARTS DISTR ORGN • STAYING POWER – KODAK V/S DIGITAL CAMERAS • REAL SUPERIORITY – COKE V/S PEPSI • RIVAL TRUMPING – SOUTH WEST FARE, CADILLAC(LINCOLN) WEAKNESSES • REPRESENT COMPETITIVE LIABILITIES INFERIOR/UNPROVEN SKILLS, EXPERTISE DEFECIENCIES IN ASSETS MISSING OR INFERIOR CAPABILITIES NOTE : AN HONEST UNBIASED ASSESMENT OPPORTUNITIES • MATCHING WITH FINANCIAL AND RESOURCE CAPABILITIES THREATS CERTAIN FACTORS IN EXTERNAL ENVIRONMENT NOTE : ALSO TO ASSESS INTERNAL SCRUTINY 76 SWOT ANALYSIS STRENGTHS 1._________ 2._________ 3._________ 4._________ 5._________ OPPORTUNITIES 1._________ 2._________ 3._________ 4._________ 5._________ WEAKNESSES 1._________ 2._________ 3._________ 4._________ 5._________ THREATS 1._________ 2._________ 3._________ 4._________ 5._________ -Most Basic Model -Generally ‘The Starting Point’ -4 Basic Strategies: 1. Consolidate Strengths 2. Strengthen Weaknesses 3. Encash Opportunities 4. Protect Threats Q3 ARE THE COMPANIES PRICES AND COSTS COMPETITIVE • TWO ANALYTICAL TOOLS ARE •VALUE CHAIN ANALYSIS •BENCHMARKS Value Chain and Competitive Advantage The value chain disaggregates a firm into its strategically relevant activities IN ORDER TO Understand the behaviour of costs of existing & potential sources of differentiation SUPPLIER FIRM CHANNEL BUYER VALUE CHAINS Each firms value chain is composed of “Nine “ ‘ generic categories of activities which are linked together in characteristic ways 79 Primary activities are the activities involved in the “Physical creation “ of the product and its sale and transfer to the buyers as well as after sales activities SUPPORT activities support the Primary Activities and each other by providing purchase inputs, technology,human 80 resources and various firmwide functions VERTICAL INTEGRATION -“It is the combination of technologically distinct,production,distribution,selling and/or other economic processes within the confines of a single firm.” Porter As such it represents a decision by the firm to utilize internal or administrative transactions rather thanmarket transactions to accomplish the economic purposes. Eg. Own sales force or independent selling organization. i.e. Functions performed by a consortium of independent economic entities,each contracting with a single co-ordinator. Eg. Book Publishing and recording industries. Many publishers contract for editorial services,layout,graphic,printing,distribution and selling,RETAINING for the firm little more than decisions about which books to publish,marketing and finance. Some recording companies similarly contract with independent artists,producers,recording studios,disc pressing facilities and distribution and marketing organizations to create, manufacture and sell each record. Many V.I decisions are in terms of MAKE x BUY. 81 VALUE CHAIN ANALYSIS • CONSISTS OF THE LINKED SET OF VALUE CREATING ACTIVITIES THE COMPANY PERFORMS INTERNALLY •PRIMARY ACTIVITIES – ARE FOREMOST IN CREATING VALUES FOR CUSTOMERS •SUPPORT ACTIVITIES – THAT FACILITATE AND ENHANCE THE PERFORMANCE OF PRIMARY ACTIVITIES •NOTE:VALUE CHAIN INCLUDES PROFIT MARGIN BECAUSE A MARKUP OVER THE COST OF PERFORMING THE FIRMS VALUE CREATING ACTIVITIES IS CUSTOMARILY PART OF PRICE(OR TOTAL COST) BORNE BY USERS VALUE CHAIN ANALYSIS NOTES :FUNDAMENTAL OBJECTIVE OF EVERY ENTERPEISE IS TO CREATE AND DELIVER VALUE TO BUYERS WHOSE MARGIN OVER COST YIELDS ATTRACTIVE PROFITS EXPOSURE TO MAJOR ELEMENTS OF COST STRUCTURE. EACH ACTIVITY IN THE VALUE CHAIN GIVES RISE TO COSTS AND TIES UP ASSETS, ASSIGNING THE COMPANY’S OPERATING COSTS AND ASSETS TO EACH INDIVIDUAL ACTIVITY IN THE CHAIN PROVIDES VALUE CHAIN ANALYSIS •COST ESTIMATES •CAPITAL REQUIREMENT • ASCERTAINS RELATIVE COST POSITION vis-a-vis RIVALS Fig. 4.3: A Representative Company Value Chain WHY VALUE CHAINS OF RIVAL COMPANY’S OFTEN COLLIDE • EVOLUTION OF BUSINESS • INTERNAL OPERATIONS • STRATEGY • ECONOMICS OF THE ACTIVITIES • VARYING DEGRESS OF INTEGRATION • Eg: ALUMINIUM CAN PRODUCERS PLANT NEXT TO BEER BREWERIES AND USE OF OVERHEAD CONVEYERS • A COMPANY’S COST COMPETITIVENESS DEPENDS NOT ONLY ON THE COSTS OF INTERNALLY PERFORMED ACTIVITIES ie ITS OWN VALUE CHAIN BUT ALSO ON THE COSTS IN VALUE CHAIN OF ITS SUPPLIES AND FORWARD CHANNEL ALLIES Fig. 4.4: Representative Value Chain for an Entire Industry DEVELOPING THE DATA TO MEASURE A COMPANY’S COST COMPETITIVENESS • BREAK DOWN DEPARTMENT • COST ACCOUNTING DATA INFORMATION • THE COST OF PERFORMING THE SPECIFIC ACTIVITIES BENCHMARKING THE COSTS OF KEY VALUE CHAIN ACTIVITIES • COSTS OF PERFORMING COMPANY’S ACTIVITY • BENCHMARKING AGAINST COMPETITIVE COST AND/OR ANY INDUSTRY’S BETTER PERFORMING ACTIVITY NOTE : IN 1979 JAPANS COPIER IN US WAS $9600 EACH (DUMPING SUSPECTED) LESS THAN XEROX’S PRODUCTION COSTS FUJI XEROX STUDY TOUR REVEALED INEFFICIENCIES IN THE MANUFACTURING PROCESS STRATEGIC OPTIONS FOR REMEDYING A COST DISADVANTAGE • THREE KEY AREAS •COMPANY’S OWN ACTIVITY SEGMENT •SUPPLIERS PART OF THE INDUSTRY’ VALUE CHAIN •FORWARD CHAIN PORTION OF THE INDUSTYR CHAIN TRANSLATING PROFICIENT PERFORMANCE OF VALUE CHAIN ACTIVITIES INTO COMPETITIVE ADVANTAGE • DEVELOP COMPETENCIES AND CAPABILITIES THAT PLEASE BUYERS • THAT RIVALS DON’T HAVE OR CANT MATCH •EG MERCK & GLAXO IN EXTENSIVE R&D TO ACHIEVE FIRST DELIVERY OF NEW DRUGS CAREFULLY CONSTRUCTED APPROACH TO PATENTING •FED EX IN FLEET OPERATIONS Q.4 IS THE COMPANY COMPETITIVELY STRONGER OR WEAKER THAN KEY RIVALS • HOW DOES IT RANK vis-a-vis COMPETITORS ON EACH IMPORTANT FACTORS • DOES IT HAVE A NET COMPETITIVE ADVANTAGE OR DISADVANTAGE vis-à-vis MAJOR COMPETITORS •NOTE : LIST OF KSF AND MOST TELLING MEASURES OF COMPETITIVE STRENGTH OR WEAKNESSES ON 1 TO 10 SCALE BOTH WEIGHTED AND UN WEIGHTED Q.5 WHAT STRATEGIC ISSUES AND PROBLEMS MERIT FRONT BURNER MANAGERIAL ATTENTION • DRAW ON THE RESULTS OF BOTH INDUSTRY AND COMPETITIVE ANALYSIS AND THE EVALUATION OF COMPANY’S OWN COMPETITIVENESS •PINPOINT EXACT PROBLEM !!! •EXERCISE – GROWING POPULARITY OF DOWNLOADING MUSIC FROM THE INTERNET – DOES IT GIVE RISE TO A NEW MUSIC INDUSTRY VALUE CHAIN? The STRUCTURAL ANALYSIS OF INDUSTRIES AND GENERIC STRATEGIES CHAPTER 5 Competitive Strategies essence is ‘ Relating a Company to its Environment’ By Michael Porter 95 Competition in an Industry is rooted in its underlying economic structure The state of competition is an industry depends of five basic competitive forces The Collective Strengths of these forces determines the ultimate profit potential * *measured in terms of long run return on invested capital in an industry. POTENTIAL ENTRANTS Threat of new entrants INDUSTRY COMPETITORS BUYERS SUPPLIERS Bargaining power of suppliers RIVALRY AMONG EXISTING FIRMS Threat of substitute products or services SUBSTITUTES Bargaining power of buyers F1 Force One: Threat of Entry • Depends on ‘barriers to entry’ that are present coupled with reactions from existing competitors that new entrant can expect Six Major Sources • Six major sources of Barriers to Entry are: 1. 2. 3. 4. 5. Economies of Scale Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels (Note B) Cost of Disadvantages Independent of Scale Govt. Policy 6. F 1 (1) Economies of Scale • Decline in unit costs of a product (or operation or function that goes into producing a product) • The principle of Economies of Scale applied to every function of business including manufacturing, purchasing, R&D, marketing, service network, sales force utilisation, distribution. • Eg. Xerox and General Electric realised scale of economies in production, research, marketing and service. Color tube production. JOINT COSTS • A firm producing product A (or an operation or function that is part of producing A) must inherently have the capacity to produce product B. • E.g. Air passenger service and Air Cargo – business units shares intangibles assets such as brand-name or know-how. • Vertical Integration F1 (2) Product Differentiation • Established Firms have brand identification and customer loyalties •Reasons could be • Past advertising • Customer service • Product differences • Being first in industry Strong and most important in baby-care products, OTC drugs, cosmetics, investment banking, public accounting etc. Differentiation Variables Product Services Personnel Channel Image Form Ordering Case Competence Coverage Symbols Features Delivery Courtesy Expertise Media Performance Installation Credibility Performance Atmosphere Conformance Customer training Reliability Durability Customer consulting Responsiveness Reliability Maintenance and repair Communication Repairability Miscellaneous Style Design 105 Events F1 (3) Capital Requirements • Sensitive if unrecoverable up front advertising – R & D • Plus areas such as •Customer Credit •Inventories •Start-up losses • Case – Xerox will rent (not sell) copiers Increase in working capital ! - Capital Intensive areas like computer, mineral extraction F1 (4) Switching Costs • One time costs facing the buyer of switching from one suppliers product to another’s • Switching Costs include •Employee retaining cost •New ancillary (helping/service) equipment •Cost and time in testing a new source •Product re-design •Need for technical help as a result of reliance on seller engineering aid •Psychic cost of severing a relationship Case: Intravenous (IV) solutions and kits for use in hospitals hardware for hanging IV bottles F1 (5) Access to Distribution Channels • New entrant to persuade the channels to accept its products through - Price breaks - Co-operative advertising allowances - And likes that reduce profits If , more limited wholesale or retail channel Tougher entry for new entrants Case – Timex outlet in watch industry. Note (B) Cost Disadvantages Independent of Scale • Established firms may have cost advantages • - Not replicable by potential entrants • - No matter of their size and economies of scale On account of factors such as :(i) Proprietary product technology Patents, secrecy (ii) Favorable access to raw materials (iii) Favorable locations (iv) Govt. subsidiaries (v) Learning or experience curve- Price drops with production increases due to experience especially in aircraft mfg, ship building (vi) Net Experience is kept proprietary F1 (6) Govt. Policy • Licensing requirements • Limits on access to Raw Materials • Regulated Industries EXPECTED RETALIATION • History of vigorous retaliation • Established firms with substantial resource • Established firms with great commitment to the industry • Slow industry growth ENTRY DETTERRING PRICE • The prevailing structure of prices which just balances the potential rewards from entry, with the expected costs of overcoming structural entry barriers and risking retaliation If current price > e.d.p.---- high profit --- entry YES PROPERTIES OF ENTRY BARRIERS • -E.B. do change as conditions change - Case: • Firms strategic decision can have a major impact. • Firms possess resources or skills which allow them to overcome E.B. better than others ! EXPERIENCE & SCALE AS ENTRY BARRIERS • Both after coincide but they have very different properties as E.B. •Note: Products/ Process innovations, Trade-off with other barriers, Industry Growth & (2 or more) players in Experience Curve, Mkt. Development details. F2 Force Two: Intensity of Rivalry Among Existing Competitors • Rivalry because •One or more competitors feels pressure •See/s opportunity to improve position • Some tactics are •Price competition •Advertising battles •Product introduction •Increased customer service •Warranties Interactive Structural Factors – Intense Rivalry 1. 2. 3. 4. 5. 6. 7. 8. Numerous or Equally Balanced Competitors Slow Industry Growth So Market Share Game! High Fixed or Storage Lost Lack or Differentiation or Switching Cost Product is almost commodity, Capacity Augmented in Large Increments Diverse Competitors Firms diverse to parent Co’s – Complexity High Strategic Stakes High Exit Barriers - Specialized assets – fixed costs or exit - Strategic inter-relationship – emotional barriers - government & social restrictions SHIFTING RIVALRY • Industry moves from growth to maturity •Decline profits & a shake-out • An acquisition introduces a very different personality to an industry eg. P&G acquires Charmin Paper Company. • Technological innovation can boost Fixed Cost • Strategic shift (say) engg. Assistance to customers in redesigning services etc. EXIT BARRIERS AND ENTRY BARRIERS EXIT B. EXIT B. Low L E N o w T High E L Low Low N o Stable Risky T w Returns Returns H Y i B. Low R R Y High g h H i B. g h High High Stable Risky Returns Returns EXIT BARRIERS AND ENTRY BARRIERS Best Worst Entry H Exit L Profit/Returns √ …… H H …… L L …… unexciting but low Returns L H …… unfortunate position √ + Risk F3 FORCE 3: PRESSURE FROM SUBSTITUTE PRODUCTS 1. Subject to trends improving their price- performance tradeoff with the industry’s product 2. Are produced by industries earning high profits Sugar producer – high fructose corn syrup Natural fiber – synthetic yarn F4 FORCE 4: BARGAINING POWERS OF BUYERS 1. 2. 3. 4. 5. 6. 7. 8. Concentrated or purchases large volumes relative to seller sales Product purchased from industry represents a significant fraction of buyer’s costs Product purchased are standard or undifferentiated Faces few switching costs Earns low profits Buyers pose credible threat of Backward Integration. Industry's products is unimportant to the quality of buyer’s products or services Buyer has full information. ALTERING BUYING POWER • Co’s strategic decision – dept. stores & clothing stores to LARGE CHAINS also choice of buyer selection • Replacement market for most products is less price sensitive than OEM market. F5 FORCE 5: BARGAINING POWER OF SUPPLIERS 1. Dominated by a few companies and is more concentrated than industry it sells to. 2. Not obliged to contend with other substitute product for sales to the industry 3. Industry is not an important customer of the supplier group 4. Suppliers product is an important input to the buyer’s business contd 5. Supplier groups products are differentiated or it has built up switching costs. 6. Supplier group poses a credible threat of Forward Integration 7. Labour also to be treated as supplier based an degree of organization, scarce varieties & skill and possible growth ! AND GOVERNMENT!! GENERIC COMPETITIVE STRATEGY Three Generic Strategy (Internally consistent successful generic strategies) 1. Overall cost leadership: Texas Instruments 2. Differentiation : Intel Micro processors 3. Focus : ATR Walk Shoes in extreme sports segment Note: Three Generic Strategies can be used singly or in combination. STRATEGIC ADVANTAGE S t r a t e g I c T a r g e t ` Uniqueness perceived by customer Industry Wide Differentiation Low cost positioning Overall Cost Leadership Focus Part Segment only OVERALL COST LEADERSHIP Due ‘Experience Curve Concept’ Yields above average returns, Gives a defence against rivalry Defends the firms against powerful buyers Defends against powerful suppliers Favourable positioning vis-à-vis substitutes. Requires…. High Relative Market Share Favourable access to raw material Heavy capital Investment Aggressive pricing Examples: Briggs & Straton has 50% of market share in small H.P gasoline. Lincoln Electric in arc welding equipment. General Motors Texas Instruments Black & Decker Du Pont Reliance Japan (as a country – in Automotive Sector) Profit = Price – Cost Cost = Price – Profit DIFFERENTITATION Creating something that is perceived industry wise as being unique. Many forms of approaches. Design forms or brand image (Mercedes Benz) Technology (Macintosh in stereo components) Features Customer service (Crown cork and seal in metal cans, Jet Airways : Paneer story) Dealer Network (ITC in foods (Biscuits etc, Caterpillar Tractors v/s Mahindra Tractors Other Dimensions Can earn above – average returns with defensible position for coping with 5 forces, resulting customer loyalty & need for a competitor to overcome uniqueness (Entry Barrier) FOCUS On a particular buyer group Segment of the product line Geographic market The firm either achieves: Differentiation from better ways in meeting need of particular target Low costs in serving the target Or both of the above Examples Illinois Tool works for fasteners. Sundaram fasteners. Howard Paper serves a narrow range of industrial grade papers. Martin Brower is the 3rd largest food distributor in USA has reduced its customer list to just 8 leading fast food chains. Other requirements of Generic Strategies Generic Strategy Commonly Required skills and resources Common Organisation Requirement Overall cost leader Substantial Capital investment and access to capital Process Engineering Labour Supervision Product design: Ease in Manufacturing Low cost distribution system. Tight cost control. Frequent control reports Structured organisation and responsibilities Incentives based on meeting strict quantitative targets Differentiation Strong Marketing Product Engineering Creative flair Capability in basic research Corporate reputation for quality or techno leadership. Strong Coordination among functions in R&D, Product development and marketing Subjective measurement and incentives instead of quantitative measures. Amenities to attract highly skilled labour, scientist or creative people. Focus Combination of the above policies directed at the particular strategic target Combination of the above policies directed at the particular strategic target Stuck in the Middle Firms failing to develop its strategy in at least are one of the three is ‘stuck in the middle’ Examples: Clark equipment in lift truck industry Chrysler, Sipani Motors- Dolphin, Fiat- Ambassador Such firms must make a fundamental strategic design. Steps for C.L or at least cost Parity May make aggressive investments to buy market share Orients towards particular target Achieve some uniqueness R O I Market Share Risk of the Generic Strategies Failing to attain or sustain the strategy For the value of the strategic advantage provided by the strategy to erode with industry evaluation Risk of overall cost leadership Technologically change that nullifies past investments or learning Low cost learning by industry new comers or followers, through imitations or through their ability to invest in state of the art facilities. Inability to see required product or marketing change because of attention placed on cost. Inflation in costs that narrow the firms ability to maintain enough of a price differential to offset competitors brand image or other ways of differentiation. Risk of differentiation Cost differential becomes too great for differentiation to hold brand equity. (Kawasaki motorcycle) Buyers’ need for the differentiating factors falls (Nirma v/s Surf) Imitation narrows perceived differentiations (Reynolds, Rotomac v/s Apsara Pencils) Risk of Focus Cost differential offsets Difference in desired products or services between strategic target and the market Competitors find sub markets within the strategic target and out focus the focuser. Industry evolution:Market life cycle Starting point is “Framework and structural analysis” Hence do ask this question “Are there any changes occurring in the industry which will effect each element of industry?” Grandfather is Product Life cycle “Frame work for forecasting evolution” More fruitful to look underneath the process to see what really drives the industry Evolutionary Processes There are some predictable and interacting dynamic processes that occur in every industry • Long term changes in growth Changes in buyer segments served • Buyer’s learning Reduction of uncertainty • Diffusion of proprietary knowledge Accumulation of experience • Expansion/contraction in scale Changes in input and currency costs Evolutionary Processes (Contd) • Product Innovation Marketing innovation, process innovation • Structural changes in adjacent industries Government Policy changes • Entries and exits Porters 5 competitive strategies CHAPTER 6 The Five Generic Competitive Strategies • Low-cost provides strategy • Broad Differentiation strategy • Best Cost Provider Strategy • Focused (or market niche) strategy based on Lower cost • Focused (or market niche) strategy based on Differentiation Strategy 1: Low Cost Provider Strategy • Meaningfully lower cost than rivals (not lowest) •HOW? • Option 1: Under price to attract price sensitive customers • Option 2: Maintain all present and increase profits Two major avenues for Achieving A1: Increase efficiency in Value Chains, Cost Drivers A2: Revamp variable cost by elimination or bypass A1: Controlling Cost Drivers 1. Economies or Diseconomies of scale 2. Learning Curve Effects 3. Costs of Key Resource Inputs E.g Union vs Non Union Workers Locational variables, etc 4. Links with other activities in value chain 5. Sharing Opportunities with others E.g Same Sales Force A1: Controlling Cost Drivers 6. Vertical Integration vs Outsourcing 7. First mover Advantage and Disadvantage E.g Yahoo, now Google 8. % of Capacity Utilization E.g Higher Depreciation + Fixed Cost 1. Spread over larger volumes 9. Strategic choices and Operating Decisions E.g adding or cutting services Adding or cutting quality features A2: Revamping the Value Chain 1. Enhance Internet technology application 2. Using direct-to-end user marketing approach 3. Simplify product design 4. Stripping away extras 5. Less capital intensive flexible process 6. By-pass high cost RM or component parts 7. Relocating facilities 8. Drop ‘something for everything’ approach EXAMPLES • Southwest Airlines •‘fast airline at the gates • 25 mins vs 45 mins • Dell Computers PC as per customer, made and shipped thus eliminates trade margins • Wal-mart with private satellite communication system When it works? 1. Vigorous Price Competition 2. Identical Usage 3. Identical Users and suppliers ready availability 4. Few Ways of Product Differentiation 5. Low costs in switching suppliers 6. Large buyers with bargaining powers 7. Newcomers use introductory low prices Pitfalls • Getting carried away with pricing • Not emphasizing on avenues of cost advantage that can be kept Proprietary •E.g Sustainability • Too fixed on Cost Reduction Strategy2: Differentiation Strategies • Buyers’ needs & preferences are too diverse • Allows companies •To command a premium price •To increase unit sale •To gain brand loyalty Types of Differentiation Themes • A unique taste Listerene • Multiple features Windows • Superior service FedEx • Engineering Design Mercedes, BMW • Prestige & Distinct Rolex • Product Reliability Johnson Baby Products • Range of Service Schweb in Stock Broker • Complete Service Campbell’s soups Where to Create 1. Supply Chain activities α end products e.g Starbucks coffee for coffee bean specification 2. Product R&D activities 3. Production R&D technology 4. Mfg activities to reduce defects 5. Distribution for faster delivery 6. Marketing, Sales and Customer Service resulting in superior assistance Approaches to achieving • Incorporate product attributes and user features that lower buyer’s overall cost • Incorporate features that enhance buyer satisfaction in non-economic or intangible ways! Goodyear Safety on roads BMW, Rolex Status, Image • Deliver value to customers that rivals don’t have or cannot afford matching Japan can bring new car models faster! Importance of Perceived Value • Subjective • First time purchase • Repurchase infrequent • Unsophisticated buyer • Sir’ eg of Sloan’s Balm & Linimend When it works? • Buyers having strong specific preference • Needs and uses are diverse • Few rivals following similar approaches • Technology change is fast-paced and competition on new features Pitfalls • Over differentiation • Charging TOO high premium • Does not lower buyer’s cost or enhance buyer’s well being • Timid way, not striving to open up meaningful gaps in quality or service or performances Strategy No 3 Best Cost Provider Strategies • Aims at more value for money • Middle ground position, hybrid balance of customization and differentiation •E.g Toyota Lexus (less than Merc and BMW) • Risk is ‘get squeezed’ b/w low cost & Diff Strategy • Target market is value-conscious buyer •Powerful in markets where buyer diversity makes product diff norm and where buyers are price sensitive & value-sensitive (Strategy no 4&5) • Focused strategies •Concentrated attention or narrowed • Target segment or niche can be defined by geographic uniqueness, special product attributes •ebay in online auctions •Porsche Sports car •Cannondalc Mountain Bike •Google Search engine •Local owner managed retail boutique Strategy No 4 Focused Low cost strategy • Target market niche customers at low cost • Replacement ink and toner cartridges of printers • E.g Motel 6 to price conscious travelers who want a clean no frills place to spend night • E.g Producers of Private label goods Strategy No. 5 Focused Differentiation strategy • Offering niche product they perceive as well suited to their unique tastes and preferences • Trade Joe’s 150 Stores = East and West coast chain in fashion food retailers offers raspberry salsa, salmon burgers jasmine fried rice, standard goods - Whimsical Treasure Hunt! • Aims at securing a competitive advantage by offering niche members a product they perceive as well suited to their own unique tastes & preferences • Examples : Rolex, Rolls – Royce, Gucci – employ Strategy 5 targeted at upscale buyers wanting products & services with world class attributes When 4 & 5 applicable? • Target market niche us big enough • Industry leaders don’t mind presence V. their success • Difficult for multi-segment competitor’s strategy • Industry has many niches and few rivals attempt • Focuser can challenge based on goodwill built in niche Risks of 4& 5 • Competition matching focuser’s capabilities • Potential for preference & needs of niche members to shift over time toward product attributes desired by majority • Segment becoming so attractive, it is soon inundated with competitors, intensifying rivalry and splintering profits! Types of Strategies 164 Strategy Definition Example 1. Market Penetration Seeking increased market share for present products or services in present markets through greater marketing efforts. Ameritrade ,the online broker ,tripled its annual advertising expenditure to $200 million to convince people they can make their own investment decisions. 2. Market Development Introducing present Britain’s leading supplier products or services into of buses, Henly’s PLC, new geographic area. acquires Blue Bird Corp., North America’s leading bus maker. 3. Product Development Seeking increased sales by improving present products or services of developing new ones. Apple developed the G$ chip that runs at 500 megahertz. Strategy Definition Example 4. Forward Integration Gaining ownership or increased control over distributers or retailers. General Motors is acquiring 10% of its dealers. 5. Backward Integration Seeking ownership or increased control of the firm’s suppliers. Motel-8 acquired a furniture manufactures. 6. Horizontal Integration Seeking ownership or increased control over competitors. Hilton recently acquired Promus. Strategy Definition Example 7. Concentric diversification Adding new but related products or services. National Westminister Bank PLC in Britain buys the leading insurance company, Legal & General group PLC. 8. Conglomerate diversification Adding new, unrelated products or services. H&R Block, the top tax preparation agency, said it will buy discount stock brokerage Old Financial for $850 millions in cash. 9. Horizontal diversification Adding new, unrelated products or services for existing customers. The New York Yankees baseball team is merging with the New Jersey Neys basketball team. Strategy Definition Example 10. Joint venture Two or more sponsoring firms forming a separate organization for cooperative purpose. Lucent Technologies & Philips Electronics NV formed Philips Consumer Communications to make & sell telphones. 11. Retrenchment Regrouping through cost Singer, the sewing & asset reduction to machine maker, reverse declining sales & declared bankruptcy. the profit. 12. Divestiture Selling a division or a part of organization. 13. Liquidation Selling all of company’s Ribol sold all its assets assets, in parts, for their and ceases business. tangible worth. Harcourt General, the large US publisher, selling its Neiman Marcus division. 14. Michael Porte Generic Strategies •Customer Leadership •Differentiation •Focus 15. The Value chain Strategy Definition Example 16. Mergers Two organizations(of about equal size) unite to form one enterprise. Phone Giants US West and Quest in 1999. 17. Acquisition Large organization purchases( acquires) a smaller firm or vice versa. Dow chemicals plans to buy Union Carbide, so as to be No.2 after DuPont pushing BASF to No.3 18. Takeover or Hostile takeover When an acquisition or merger is not desired by both parties it is takeover. Olive H took over Telecom Italia. Volkwagen AG has purchased Rolls-Royce, Bently, Lamborghini, Cosworth & Buggati. 19. Leveraged Buyouts (LBOs) • A leveraged buyout occurs when a corporation’s shareholders are bought by company’s management and other private investors using borrowed funds(hence leverage). • It avoids hostile takeover. • Senior management decisions may solicit that particular divisions do not fit into an overall corporate strategy or must be sold to raise cash ,or reciept of an attractive offering price. 20. Joint Venture • Two or more companies form a temporary partnership or consortium for the purpose of capitalizing on some opportunity. • Eg: Nestle & Pillisbury a JV named Ice Cream Partners USA in California(N). 21. Co-operative Arrangements Includes R&D partnerships, Cross distribution agreements, Cross licensing agreements, & joint-bidding consortia. BEYOND COMPETITIVE STRATEGIES CHAPTER 7 To complement choice of basic competitive strategy • Strategic alliances and collaborative partnerships • Mergers and acquisitions • Industry value chain integration • Out source or in-house • Offensive and defensive move • Internet as distribution channel • Any others 175 STRATEGIC ALLIANCES AND COLLABORATIVE PARTNERSHIPS • Global race….to be recognized as global market leader • Race to seize opportunities on advancing technology frontiers • Strategic alliances are collaborative partnerships where two or more companies join forces to achieve mutually beneficial strategic outcomes i.e Toyota with suppliers Microsoft with independent software developers Oracle has 1500 alliances IBM and Microsoft has 200 partnerships with ebusiness enterprises Samsung with Sony, yahoo, Hp, Intel Dell etc STRATEGIC ALLIANCES AND COLLABORATIVE PARTNERSHIPS • Note: 35% revenue in 2003 Vs 15% in 1995 by alliance • To get into critical country matches quality • Accessing valuable skills and competencies • Master new technologies & expertise e.g Volvo, Renault Peugeot alliance in making engines own plant economically J & J with Merck for Pepcid AC, Stomach distress remedy developed by Merek, marketed by J & J United, American, Continental, Delta & Northern Airlines MERGER AND ACQUISITION STRATEGIES • Suited for situations in which alliances and partnerships do not go far enough in providing a company with access to the needed resources and capabilities. • Ownership more permanent then partnerships. • Merger is a pooling of equals, with the newly created company often taking on a new name • Acquisition is a combination in which one company, the acquirers purchases and absorbs the operation of the acquires. • Relates more to ownership, managerial control and financial arrangements OBJECTIVES • To gain more market share and create more ethical operation: i.e Daimler Benz + Chrysler = Daimler Chrysler • To expend geographic coverage • In new product categories or international markets. i.e: Pepsi Co acquired Quaher Oats, Nestle, Unilevers, Proctor & Gamble • Quick access to technology + R& D efforts: i.e. Lucent technologies in T/com networking • To try to invent a new industry, thus new opportunities:i.e Time warner, Paramount Pictures Entertainment • Exercise: Clear channel……Global market Leader..Case study www.clearchannel.com, Sep 2003 Business week, oct 19,1999, p -56 INDUSTRY VALUE CHAIN INTEGRATION • Vertical integration scope is within basic industry Source of supply backward to towards end users format => Full or partial integration Strengthens firms competitive position But, disadvantages i.e new technology adoption slow, less reliance of own resources in backward or forward, capacity matching problems, radically different kinds of requirement OUTSOURCE OR INHOUSE Two main driving themes are: • Outsiders can often perform certain activities better or cheaper • Outsourcing sing allows a firm to focus its entire energies on its core business ADVANTAGES • Cheap • Better • Non crucial to core • Risk reductions • Streamlining help • Allows company to concentrate on core competencies • Enhance ability to innovate with “best in world” • Flexibility • Assembly of diverse kind • control MIND OF THE STRATEGIST by kenichi ohmae INTRODUCTION • INCREMENTAL IMPROVEMENT • SUCCESSFUL BUSINESS STRATEGIES RESULT NOT FROM RIGOROUS ANALYSIS BUT FROM A PARTICULAR STATE OF MIND • GREAT STRATEGIC CALL FOR TECHNICAL MASTERY IN THE WORKING BUT ORIGINATE IN INSIGHTS THAT ARE BEYOND THE REACH OF CONSCIOUS ANALYSIS (OLDER IS CEO SO MIDDLE AGE DRIVER) INTRODUCTION • GROUP OF YOUNG “SAMURAIS” WHO WOULD PLAY A DUAL ROLE A. AS REAL STRATEGISTS GIVING FREE REIN TO IMAGINATION, ENTREPRENEURIAL FLAIR A. AS STAFF ANALYSISTS TESTING OUT DIGESTING & ASSIGNING PRIORITIES TO THE IDEAS & PROVIDING STAFF ASSISTANCE TO LINE MANAGERS IN IMPLEMENTING THE APPROVED STRATEGIES. A1 ANALYZING POINT :THE STARTING Habit of Analysis Intellectual Elasticity or Flexibility to come up with realistic responses to the changing conditions Ultimate non-linear thinking tool is BRAIN THE FIRST STAGE • To pinpoint the critical issues in the situation • The questions are not framed to point forward a solution, rather they are directed towards finding remedies to symptoms • Concrete Phenomena - > Grouping - > Abstraction - > Determination of the Approach(Very concrete and Specific) 185 Fail safe methodology Draw issue diagram (like decision tree) Value Analysis and Value Engineering The Profit Diagram • Can profit be gained externally? • Can profits be increased by raising efficiency internally? • True strategist depends on neither on one nor the other • He has a more reliable recipe for success • “Combination of analytical method and mental elasticity is Strategic Thinking” Kenichi Ohmae 186 A2 FOUR ROUTES TO STRATEGIC ADVANTAGE • BUSINESS STRATEGY IS ALL ABOUT ‘COMPETITIVE ADVANTAGE’ 1. To identify the key factors for success (KFC) in industry (or business) concern and then to inject a concentration of resources into a particular area where the company sees an opportunity to gain the most significant strategic advantage over it’s competitors. “KFC” Strategy! 2. To exploit any difference in the competitive conditions between the company and its rivals. a. Make use of technology, sales, network profitability and so on of those of its products which are not competing directly with the target competitor OR b. Make use of any other differences in the composition of assets between the enterprise and its competitors “Relative Superiority” Strategy! 3. To upset the key factors for success on which the PRINCIPAL competitor has built an advantage. Starting point is to challenge the accepted assumptions governing the way of doing business rules of the game , upset status ! ‘Aggressive Initiatives’ Strategy ! 4. Deployment of innovations Say new market, new product thus exploitation of the market by vigorous measures in particular areas that are untouched by competitors. ‘Strategic Degrees of freedom’ Strategy ! A3 Focusing on key factors ‘KFS Strategy !’ Two approaches A and B A. To dissect the market As IMAGINATIVELY as possible to identify its key segments B. To discover what distinguishes Winner companies from looser and then to analyze the difference between them 3 A. Dissecting the market 1. P1 P2 P3 P4 P5 P6 eg. Japanese ship building company matrix Larger Tender P Class Mid Tender a Small Tender y High Trade Cargo o Mid Trade Cargo f Low Trade Cargo f Companies ‘ & ‘ work on product market M1 European 1st European 2nd Class Green 1st Class Green Small Hong Kong Petroleum Developing Countries Communist Block Pn Liquid Gases priority Eg. Forkift truck manufacturer “Customers in retailing and constructing industries” B. Highlighting differences between W&L Distribution network (Service and Lift) Identifying the KFS is not enough! Toyota Root out waste! …….VAM Hitachi Management improvement…MI A 4 Building on relative superiority Eg. Japan’s amateur colour film market 1. Fugi.. leader gaining MS 2. Sakura leader in 1950 but losing Blind test ‘product quality’ no problem! But word association in Japanese Sakura cherry blossom Suggesting a soft, blurry pinkish image ! Fuji Brilliant blue skies and white snows of Japanese sacred mountain Sakura analyzed the market from 1. Structured 2. Economic & 3. Customer point of view Discovered Growing cost (OS) – Consciousness among film customers Opportunity to introduce 24 – exposure film at the same price as 20 - exposure film Issue is financial strength Sakura analyzed the market from 1. Structured 2. Economic & 3. Customer point of view Discovered Growing cost (OS) – Consciousness among film customers Opportunity to introduce 24 – exposure film at the same price as 20 - exposure film Issue is financial strength A5. PURSUING AGGRESSIVE INITIATIVES • Strategist’s weapons are •Strategic thinking •Consistency •coherence WHEN KFS SATURATION Is REACHED • Thoroughgoing challenge to the accepted common sense of the industry •Why FTL tube be long and narrow? •Why not built in flash in camera •Why outes publication can not be eaten •Why stockpile The question Why • Demand reasons for that and persist in a shing Why ? 4- 5 times in succession. A 6. EXPLOITING STRATEGIES • DEGREES OF FREEDOM = SDF • SDF DESIGNATES THE AXES ALONG WHICH SUCH A STRATEGY REALISTICALLY WORKED OUT. • E.G. MORE SAFETY IN CAR •IMPROVEMENT IN VISIBILITY •INSTRUMENTATION, VENTILATION SYSTEM •FATIGUE FREE SEATS, BREAKING SYSTEM •SUSPENSION SYSTEM, ENERGY ABSORBING •BODY STRUCTURE Crucial Elements in SDF • SDF CONCEPT IS THAT OF THE OBJECTIVE FUNCTION, THE VOLUME OR VARIABLE WE WISH TO MAXIMIZE. • E.G. COFFEE BUSINESS (TASTE OF COFFEE) •KIND OF BEAN •QUALITY OF BEAN •TYPE OF ROAST •FINENESS OF GRIND •ELAPSED TIME BETWEEN GRINDING & BREWING •WATER HARDNESS •MODE OF CONTACT BETWEEN WATER AND GROUND COFFEE •TEMPERATURE AT WHICH THE BREWED COFFEE IS MAINTAINED •ELAPSED TIME BETWEEN BREWING & DRINKING Diversification : Strategies for Managing a Group of Businesses Chapter 8 Corporate Strategy Perspective: Four Facets Picking new industries to enter and deciding on means of entry. Initiating actions to boost the COMBINED PERFORMANCE of the business the firm has entered. Pursuing opportunities to leverage cross business value chain relationships and strategic fits into competitive advantage. Establishing investment priorities and steering corporate resources into the most attractive business unit. When to Diversify [Concentrate on a single business and success! no need to diversify! e.g. Mc Donald’s, South-West, Wal-Mart, Fed-Ex etc…] Big risk of single business is that firm’s eggs in ONE Industry Basket! If market erosion by new technologies OR o/w new products, fast shifting buyer preferences etc => Diversify. e.g. Digital cameras and film and film processing industry.CD and DVD technology for cassettes, tapes and floppy disks. i.e. opportunities to grow revenues and earnings in the company’s mainstay business taper out / become narrow… IT IS THE TIME TO DIVERSIFY! Factors signaling time to diversify [Besides aforesaid] 4 other instances viz. 1. That industry’s technologies and products complement its present business 2. Can leverage existing competencies & capabilities where same resource strengths are valuable assets 3. Closely related businesses with new avenues for reducing costs 4. Has powerful & well-known brand name that can be transferred to other businesses Contd.. Building Shareholder Value: Ultimate Justification 1. Industry Attractiveness Test 2. The Cost-of-Entry Test 3. The Better-off Test Strategies for Entering New Businesses 1. Acquisition 2. Internal Start-up 3. Joint Ventures / Strategic Partnerships Strategies for Entering New Businesses 1. Acquisition of an Existing Business • 2. Whether friendly or hostile Internal Start-up • Building a new business subsidiary from scratch • Parent company has skills • Ample time to launch • Costs lower than acquiring • Less expected head-on collisions with leaders • Production will not hamper new industry’s demand - supply Contd.. 3. Joint Ventures and Strategic Partnerships • Joint Ventures: Forming a new corporate entity owned by partners • Strategic Partnership: When one of the partner so chooses • Useful in 3 types of situations: i. Complex, risky for single organization to capitalize ii. New industry require broader range of competencies iii. ONLY WAY to gain desirable entry in new industry Choosing Diversification Path: Related Vs Unrelated Related: • Value chains possess competitively • Valuable cross business value chain strategic fits Unrelated: • Dissimilar • No valuable relationships Related Businesses Strategic fits happen 1. Along the Value chain/ Supply chain activities. 2. R&D and technology. 3. Manufacturing 4. Distribution 5. Sales & marketing 6. Managerial & Administrative support 7. Economies of scope & Competitive Advantage 8. Any other suitable Unrelated Businesses Focuses on building and managing a portfolio of business subsidiaries capable of delivering desired performances! (other abovestated issues are ignored) And evaluation on set criteria Profitability, R.O.I. Requirement of capital expansion, Working capital etc. Growth potential (SIGNIFICANT?) Big business Union or Government regulation difficulty Contd.. Vulnerability to recession, inflation etc. and quick opportunities when 1. Company’s assets are undervalued 2. Financially distressed companies 3. Bright growth prospect but short of capital. Best example of Unrelated: WALT DISNEY 1. Theme parks 2. Disney cruise line 3. Resort properties 4. Movie/ Video productions 5. TV broadcasting – ABC, Disney channel, Toon etc. 6. Radio broadcasting 7. Musical recordings 8. Sales & Animation arts 9. Baseball franchise 10. Books & magazines publishing 11. Interactive software & Internet sites 12. The Disney store retail shops Combination of Related and Unrelated Diversification Strategies 1. Evaluate Industry attractiveness 2. Evaluate Business: Unit competitive strength 3. Check competitive advantage potential of cross business strategic fits. 4. Check for resource fits. 5. Rank business units – Performance + Priority 6. Crafting new strategic moves to increase performance. MILLER & DESS FORMS VERTICAL M ACQUISITIONS E A N STRATEGIC S ALLIANCES INTERNAL DEVELOPMENT Times inc. acquires Warner Communication (Entertainment business) Cetus (Bi-tech) with larger Companies giving Capital & Markets Human → Full line health care services across Insurance, Hospitals & Follow-up treatment HORIZONTAL GLOBAL Philip Morris buys 7-UP (Cigarette + Soft drink) BASF buys Inmont in U.S. (Chemical Company) Dow Chemicals & Corning Glass - A JV bigger than either Fuji photos and Xerox in Photocopiers 3M gets more than 25% revenue from new products of last 5 years. An-Busch opens new markets by taking Budweiser Concentric Diversification • Addition of business related to the firm in terms of technology, market or products • High degree of compatibility with the current business Eg. HEAD SKI – Summer sporting goods & clothing to offset seasonality of snow business. Conglomerate Diversification • Firm plans to acquire a business because it represents the most promising investment opportunity available. • Sole concern is Profit Pattern. • Little concern for product/ market strategy with existing. ANNEXURE 218 LIFE CYCLE STRATEGIES Stages of a life cycle INDUSTRY Introduction SCALE Growth Maturity Decline Time ANSOFF’s GROWTH MATRIX Three growth options are available : I. II. III. Within Current Businesses Intensive! Related to Current Businesses Integrative! Unrelated to current businesses Diversification! ANSOFF’s GROWTH MATRIX Predictions of Product life cycle Functions Introduction Growth Maturity Buyers and Buyer Behavior High income Purchaser Buyer Inertia Buyers must be Convinced Widening Buyer group Consumer will Accept uneven quality Mass Market Sophisticated Saturation Buyers of the Repeat product Buying Choosing among Brands is rule Poor quality Design and development key Different product variations Frequent design changes Good quality Technical and performance differentiati on Relaibility key Superior quality Less product Differentiatio n Less product Changes Products and product change Decline Little product Differentiatio n Spotty product quality Predictions of Product life cycle Functions Introduction Growth Maturity Decline Very High (advertising/sale s) High marketing costs Creaming price Strategy High advertising but lower percent of sales Advertising and distribution key Segmentation Efforts to extend life cycle Broaden line Packaging important Lower advertising competition Low (advertising /sales) Lower marketing costs Manufacturi High production ng and costs distribution Overcapacity Specialized channels Short production runs High skilled labor Shift towards mass production Under capacity Mass channels Scramble for distribution Some overcapacity Mass channels Long production runs with stable techniques Lower labor skills Substantial Overcapacit y Specialty channels Mass production Marketing Predictions of Product life cycle Functions Introduction Growth Maturity Decline Some exports Significant exports Few imports Falling exports Significant imports No exports Significant imports Best period to increase market share R&D, engineering are key functions Practical to change price or quality image Marketing the key function Bad time to Cost control increase market keys Share Having competitive costs Bad time to change quality image Marketing Effectiveness Keys Foreign trade Overall strategy Predictions of Product life cycle Functions Competition Risk Introduction Growth Few companies Entry of Many competitors Lots of mergers And causalities High risks Risks are covered by growth Maturity Decline Price competition Shake-out Increase in private brands Exits Fewer competitor Cyclicality sets in Predictions of Product life cycle Functions Margins and profits Introduction Growth High prices and margins Low profits Price elasticity to individual seller not as great as in maturity Highest profits Fairly high prices Recession resistant High P/E’s Good acquisition climate Maturity Falling prices Lower profits Lower dealer Margins Increased stability of market shares and price structure Poor acquisition climate Decline Low prices Low Margins Price might rise in late decline Key relationships in Industry evolution a) Industry concentration and high mobility barrier b) Converse of a) means None with low c) Exit barriers deter consolidation d) Long run profit potential and future structure Strategies For Sustaining Rapid Company Growth Theory of Horizons of Growth • Companies that are focussed in growing their revenues and earnings at a rapid or above- average pace year after year generally have to craft a portfolio of strategic initiatives covering three horizons. Horizon I: • Strategic initiatives to fortify and extend position in existing business • Initiatives typically include 1) Adding new items to present product line 2) Expand into new geographical areas 3) Launching offensives to take rival’s market share • Objective is capitalize fully on WHATEVER Growth Potential exists in Present Business Arenas Strategies For Sustaining Rapid Company Growth... Horizon II: • Strategic initiatives to leverage existing resources & capabilities by entering new Business with promising Growth “Potential. • H2 takes Back Seat as long as there is plenty of untapped growth in Present Business. • BUT move to FRONT as the onset of Market maturity dims the present Growth Prospective. Horizon III: • Strategic initiatives to plant the seeds for ventures in businesses that don’t yet exist. • Entail pumping funds into large range R&D, setting up internal venture capital fund or acquiring no. of small start-up companies. • e.g. INTEL has invested in over 100 Projects. The Three Strategy Horizons for Sustaining Rapid Growth Portfolio of Strategy Initiatives Strategy Horizon 1 “ Short-jump” initiatives to fortify and extend current businesses Immediate gains in revenues and profits Strategy Horizon 3 Strategy Horizon 2 “Medium-jump” initiatives to leverage existing resources and capabilities to pursue growth in new businesses Moderate revenue and profit gains now, but foundation laid for sizable gains over next 2-5 years “Long-jump” initiatives to sow the seeds for growth in businesses of the future Minimal revenue gains now and likely losses, but potential for significant contributions to revenues and profits in 5-10 years Time Space Matrix Strategic Position & Action Evaluation Steps to Develop SPACE Matrix • Select a set of variable to define FS, CA, ES, IS. • Assign numerical value range 1 (worst), 6 (best) FS/IS & - 6 (worst), -1 (best)and prepare scale • Compute average scores by summing values given to variables • Plot average scores for FS, IS, ES, CA • Add two scores on X-axis & plot resultant point on X. Similarly on Y. Plot the intersection on the new XY point. • Draw a Directional Vector from the origin of the SPACE matrix through the new intersection point. This Vector reveals the type of strategies recommended for the organization: Aggressive, Competitive, Defensive, Conservative SOURCE: ROW + Mason + Dickel on Strategic Management & Business Policy Example Factors that Make Up the SPACE Matrix Axes INTERNAL STRATEGIC POSITION EXTERNAL STRATEGIC POSITION Financial Strength (FS) Environmental Stability (ES) Return on investment Leverage Liquidity Working capital Cash Flow Ease of exit from market Risk involved in business Technological changes Rate of inflation Demand variability Price range of competing products Barriers to entry into market Competitive pressure Price elasticity of demand Competitive Advantage (CA) Industry Strength (IS) Market share Product quality Product life cycle Customer Loyalty Competition’s capacity utilization Technological know-how Control over suppliers and distributors Growth potential Profit potential Financial stability Technological know-how Resource utilization Capital intensity Ease of entry into markets Productivity, capacity utilization 234 Aggressive Profiles FS FS . CA IS ES A financially strong firm that has achieved major competitive advantages in a growing and stable industry . (+1, +5) (+4, +4) CA IS ES A firm whose financial strength is a dominating factor in the industry Conservative Profiles FS FS . (-2, +4) . (-5, +2) CA IS ES A firm that has achieved financial strength in a stable industry that is not growing; the firm has no major competitive advantages CA IS ES A firm that suffers from major competitive disadvantages in an industry that is technologically stable but declining in sales Competitive Profiles FS CA FS . IS CA IS (+5, -1) . (+1, -4) ES A firm with major competitive advantages in a high-growth industry ES An organisation that is competing fairly well in an unstable industry Defensive Profiles FS CA FS IS . CA IS (-5, -1) . (-1, -5) ES A firm that has a very weak competitive position in a negative growth, stable industry ES A financially troubled firm in a very unstable industry • Four quadrant framework indicates whether aggressive, conservative, defensive or competitive strategies are most appropriate for a given organization. • The axis of the SPACE matrix represent two internal dimensions • Financial Strength (FS) • Competitive Advantage (CA) AND Two external dimensions are • Environment Stability (ES) • Industry Growth (IG) • These four factors are the most important determinants of an organizations overall strategic positions. • Factors earlier included in EFE & IFE matrices should be considered in developing in SPACE Matrix. • Like TOWS, SPACE should be tailored to the particular organization being studied. TOWS MATRIX Internal Factors External Factors SO S WO S Maxi - Maxi Mini - Maxi ST S WT S Maxi - Mini Mini - Mini -Tows Matrix is a framework for a systematic analysis that facilitates matching the external threats and opportunities with internal weaknesses and threats of the organization -Tows starts with threats because in many situations a company undertakes strategic planning as a result of perceived crisis, problem or threat. TOWS MATRIX 4 Alternative Strategies 1. WT Strategy . . .minimize both W & T. eg. Form a joint venture, retrench, even liquidate! 2. WO Strategy . . .minimize W, maximize O. Eg.: development strategy to overcome W in order to take advantage of O. 3. ST Strategy . . .maximize S, minimize T. Eg.: technological, financial, managerial or marketing strengths to cope with threats. 4. SO Strategy . . .Potentially the most successful strategy, utilizing strengths to encash opportunities. TOWS MATRIX Time Dimension and TOWS Matrix Because of dynamics in the business environment, strategy designer must prepare several TOWS matrices at different points of time with T as variable i.e. T2n S S O T So ST PAST W Wo WT O T So ST PRESENT W Wo WT S W O So Wo T ST WT PRESENT + T1 S W O So Wo T ST WT PRESENT+T2, etc. Internal Strategic Positions External Strategic Positions Financial Strength Environment Stability ROI Technological Change Leverage Rate of Inflation Liquidity Demand Variability Working Capital Price Range (Competitors) Cash Flows Entry Barriers to Market Ease of Exit from Market Competitive Pressure Risk Involved in Business Price Elasticity of Demand Competitive Advantage Industry Strength Market Share Growth Potential Product Quality Profit Potential Product Life Cycle Financial Stability Customer Loyalty Technology Know-How Competition’s Capacity Utilization Resource Utilization Technological Know-How Capital Intensity Control Over Suppliers & Distribution Ease of Entry into Market EFE Matrix – External Factor Evaluation Matrix Key External Factors Weight Ratings Weighted Score OPPORTUNITIES 1. Internet Advertising 0.05 1 0.05 2. Social Pressure to Quit Smoking 0.10 3 0.30 3. Smokeless Tobacco Untapped Global Market 0.15 1 0.15 4. 5. THREATS 1. Legislation Against 0.10 2 0.20 2. Limit on Production 0.05 3 0.15 3. XYZ Government 0.20 1 0.20 TOTAL 1.00 4. 5. 2.10 IFE Matrix – Internal Factor Evaluation Matrix Key External Factors Weigh t Rating s Weighted Score OPPORTUNITIES 1. 2. 3. 4. 5. THREATS 1. 2. 3. 4. 5. TOTAL 1.00 2.75 An Example External Factor Evaluation Matrix for UST, Inc. Key External Factors Internal Strength 1. Global markets are practically untapped by smokeless tobacco market 2. Increased demand caused by public banning of smoke 3. Astronomical Internet advertising growth 4. Pinkerton is leader in discount tobacco market 5. More social pressure to quit smoking, thus leading users to switch to alternatives Internal Weakness 1. Most properties are located in Las Vegas 2. Little diversification 3. Family reputation, not high rollers 4. Laughlin properties 5. Recent loss of joint ventures TOTAL Weight Rating Weighted Score .15 1 .15 .05 3 .15 .05 .15 1 4 .05 .60 .10 3 .30 .10 .05 .05 .10 .20 1.00 2 3 2 2 1 .20 .15 .10 .20 .20 2.10 A Sample Internal Factor Evaluation Matrix Mandalay Bay Key Internal Factors Weight Rating Weighted Score Internal Strength 1. Largest casino company in the United States 2. Room occupancy rates over 95% in Las Vegas 3. Increasing free cash flows 4. Owns one mile on Las Vegas Strip 5. Strong management team 6. Buffets at most facilities 7. Minimal comps provided 8. Long-range planning 9. Reputation as family-friendly 10. Financial ratios .05 .10 .05 .15 .05 .05 .05 .05 .05 .05 4 4 3 4 3 3 3 4 3 3 .20 .40 .15 .60 .15 .15 .15 .20 .15 .15 Internal Weakness 1. Most properties are located in Las Vegas 2. Little diversification 3. Family reputation, not high rollers 4. Laughlin properties 5. Recent loss of joint ventures TOTAL .05 .05 .05 .01 .01 1.00 1 2 2 1 1 .05 .10 .10 .10 .10 2.75 The Internal-External (IE) Matrix The IFE Total Weighted Score Strong 3.0 to 4.0 Grow and build Average 2.0 to 2.99 3.0 Weak 1.0 to 1.99 2.0 1.0 4.0 High 3.0 to 3.99 THE EFE TOTAL WEIGHTED SCORE I II III IV V VI VII VIII IX 3.0 Medium 2.0 to 2.99 2.0 Low 1.0 to 1.99 1.0 Hold and maintain 248 Harvest or Divest EXECUTION OF STRATEGY CHAPTER 9 Strategy execution process 1. Building a capable organization 2. Marshaling Resources behind the drive 3. Facilitating Policies and Procedures 4. Adopting best practices & striving for continuous improvement 5. Installing information and operating systems 6. Trying rewards and incentives 7. Shaping the work environment and corporate culture 8. Exerting the Internal leadership needed to drive 1. Building a Capable Organization Staffing the organization ◦ Putting together a strong management team ◦ Recruiting and retaining capable employees Building core competencies and competitive capabilities ◦ Develop abilities to perform ◦ Tried and true competence or capabilities ◦ Distinctive competence Structuring Organization and work effort ◦ Deciding on activities to be performed internally or outsourcing ◦ Making strategy critical activities as the main building blocks of organization structure ◦ Determining degree of authority and independence 2. Marshalling Resources behind the drive • Current vs expected- strategy driven budget eg. Pulling out engineers from Govn. Projects and deploy new commercial venture discount 3. Instituting policies and procedures • Give top-down guidance • Consistency in geographically scattered units • Promote creation of work climate 4. Adopting best practices and striving for continuous improvement • Benchmarking the company’s peformance of particular activities and processes against ‘best in industry’ and ‘best in the world’ performers. • Beat the best theme • Total quality management programme. Contd… Six sigma through ◦ DMAIC(define, measure, analyze, improve, control) ◦ DMADV(define, measure, analyze, design, verify) ◦ Underlying principles- All work is process All processes have variability All processes create data that explains variability Contd.. • Institutionalizing improvement management process ,individual goal setting, group goals, and SGIA with Japanese Management technique. 5. Installing information and operating systems • Eg. Fedex => 60000 vehicles, 5.2 mn. Packages/day => so internal communication system + leading Edge flight O.S.(LEFOS) allows a single controller to direct 200 of 650+ aircrafts simultaneously 6. Rewards and incentives • Assortment of motivational techniques and rewards to enlist organizational commitment • Financial incentives head the list •Base pay increment, performance bonus, profit sharing stock rewards, contribution to retirement benefit plans •Attractive perks and fringe benefits •Reliance on promotion •Value ideas and suggestions of the employees •Climate of genuine sincerity and mutual respect •Feeling of worthwhile contribution •Flexibility of operations 7. Shaping the work environment & corporate culture • Corporate culture refers to the character of a company’s internal work environment & personality as shaped by its core values, beliefs, business principles, traditions, ingrained behavior & style of operations • Role of stories, perpetuations, culture- subculture, acquisitions, culture conflict, strong (vs weak culture) • Create fit between strategy and culture • Grounding culture in core values and ethics 8. Leading the strategy execution process • Stay on top • Exert constructive pressure • Keep organization focused on operating excellence • Lead development of stronger competencies • Ethical integrity • Corrective actions