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