Business Strategy I

BUSINESS STRATEGY - I
FACULTY
Prof. M.H.Varma
B.E.(Mech.),DMS, PGDMM, MBA(SCM)
Scope of Discussions / Objectives
Introduction to Strategic Management Strategic Purpose Vision / Mission etc. Environmental Scanning PESTEL / SWOT etc. Strategy Development - Multiple Approaches Corporate Strategy Various Facets Business Strategy - Generic / Hybrid etc. Global Strategy Products & Services Adaptation / Choice of Market Entry Strategy Implementation Key implementation Tasks
Learning Outcomes
Differentiate Strategic Management from Operational Mgt & identify the strategy development Process including different levels of Strategy Articulate the purpose of an organizations existence & communicating the same to all stakeholders Analyze the key structural drivers in the business environment to identify opportunities / threats and strategic gaps Discuss contemporary approaches to strategy development processes / evaluation of strategic choices ; assess the role of a corporate parent in a multi-business organization and its value adding capabilities in managing a porfolio of businesses Contrast the different bases of achieving competitive advantage and outline the means to achieve sustainability in a competitive environment for an SBU Outline the ways to go global and achieve global competitiveness and identify risks involved Discuss the Key tasks for effective strategy implementation and assess how to align them
Introduction to Strategic Management
Customer Retention - Key Issues

A Recent Survey says
More than 90 % of unsatisfied

customers do not complain
It costs 5 times more to get a new

customer than it does to keep a current customer
Customer Expectations / Desire

What do Customers look for in
Any Product or Service?
Right Price (affordability factor) Right Quality (reliability factor) Right Delivery (service factor)
Dawn of a New Era ..

Old Perceptions New Realities
Price : Sellers Cost plus Profit Quality : Standards determined by the Seller Marketing : A distinct Functional Activity Focus on What is good for the company Customers freedom of choice limited Customer doesnt know a thing
Price : What customer is willing to pay Quality : Standards determined by the customer Marketing : Is Everything / The whole Business is Marketing Focus on What is good for the customer Customers freedom of choice unlimited Customer is the King
What is Strategy?
Large-scale, future-oriented plan Used to interact within competitive
environment to achieve company goals Provides a framework for managerial decisions Reflects a companys awareness of the main elements of competition
What Is Strategy?
Consists of the combination of competitive moves and
business approaches used by managers to run the company

Managements game plan to
Attract
Stake
and please customers
out a market position successfully
Compete Grow
the business targeted objectives
Achieve
1-10
Definition of Strategy
Strategy is the direction and scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations.
Exploring Corporate Strategy, Seventh Edition, Pearson Education Ltd 2005
Strategic decisions
The Hows That Define a Firm's Strategy

How to please customers
How to respond to changing
market conditions
How to outcompete rivals How to grow the business
Strategy is HOW to . . .
How to manage each functional piece of the business and
develop needed organizational capabilities

How to achieve strategic and financial objectives
1-13
Strategy and Operations

Strategic Management Operational Management
Organisation-wide, holistic
Routinised Techniques and actions Managing existing resources Operating within existing strategy Operationally specific Day to day issues
Conceptualisation of issues Creating new directions Developing new resources Ambiguous / uncertain Long term
Managers Strategic Thinking (Current Status & Future Prospects)
Where are we now? ( market standing / competitive pressures / strengths & weaknesses)
Where do we want to go? (direction in which management believes the company should be headed) How will we get there? (crafting & executing a strategy to get the company from where it is to where it wants to go)
Contribution of Leading Management Gurus

Igor Ansoffs Strategic Success Paradigm
Based on extensive research study on Acquisitions by American Companies (1948-1968) Acquisitions based on a rational strategy fared better than those based on opportunistic decisions The Key Elements of the paradigm are No universal success formula for all firms Environment turbulence determines the strategy required for the success of a company The strategy aggressiveness should be aligned with the environmental turbulence
Ansoff Matrix / Ansoff Grid

Existing Products New Products
Existing Market
Market Penetration
Product Development
New Market
Market Development
Diversification
Ansoffs Matrix
Provides four different growth strategies
Market Penetration Companies seek to achieve growth with existing products in their current market segments . Market Development Companies seek growth by targeting its existing products to new market segments
Product Development Companies develop new products targeted to its existing market segments. Diversification Companies grow by diversifying into new business by developing new products for new markets.
Ansoffs Matrix and Risk
The greater the degree of newness, the greater is the degree of risk
Market Penetration little risk involved
Market Development moderate risk

Product Development moderate risk
Diversification high degree of risk as both product and market are new & unknown
Ansoffs Matrix Use & Application

The Matrix is a framework to explore directions for strategic growth It is the most commonly used model for analysing the possible strategic direction that a business should take It not only identifies and analyses different growth opportunities, it also encourages planners to consider both expected returns and risks However, real world examples do not fit neatly into the four cells of the Ansoffs Matrix
The management capabilities should be aligned with the environment to optimize the companys success
Book Corporate Strategy (1965) played a key role in the development of strategic planning Introduced concepts Gap Analysis & Synergy Mintzberg Strategy as Craft
Added a new dimension to strategic management by bringing the personal side of the manager Book The Nature of Managerial Work (1973) advocated a more human approach to strategy formulation & implementation
Saw strategic formulation as a delibrate and delicate process
Peter Druckers Contribution
Management is not just passive & adaptive behaviour Managing implies responsibility for attempting to shape the economic environment for planning and carrying through changes in that economic environment Major contribution to business strategy was the introduction of MBO concept (1954) MBO is more than a technique of management, it is a philosophy of Managing
Michael Porter : Strategy and Competitive Advantage
Introduced generic strategies like focus, cost leadership, cost differentiation etc. Five Forces Theory
the threat of new entrants the bargaining power of customers the bargaining power of suppliers the threat of substitute products the rivalry between existing players
Books Competitive Strategy (1980) and The Competitive advantage of Nations (1990)
1-24
Dimensions of Strategic Decisions

Strategic issues require topmanagement decisions
Strategic decisions cover
several
areas of a firms operations
Usually only top management has

the perspective needed to understand their broad implications
1-25

Strategic issues require topmanagement decisions
Usually only top managers have

the power to authorize necessary resource allocations
1-26

Strategic issues require large amounts of the firms Resources
They involve substantial allocations of

people, physical assets, and money
Strategic decisions commit the firm to

actions over an extended period
1-27

Strategic issues require large amounts of the firms Resources
In highly competitive firms, achieving

and maintaining customer satisfaction frequently involves commitment from every facet of the firm
1-28

Strategic issues often affect the firms long-term prosperity
Strategic decisions commit the firm for a

long time, typically 5 years; however the impact lasts much longer
Once a Co., has committed itself to a

strategy, its image and competitive advantages are usually tied to that strategy
1-29

Strategic issues often affect the firms long-term prosperity
Companies become known for what they

do and where they compete. Shifting away from that can jeopardize their previous gains.
1-30

Strategic issues are future-oriented
They are based on what managers

forecast, rather than what they know
Emphasis is on the development of solid

projections that will enable a Company to seek the most promising strategic options
1-31

Strategic issues are future-oriented
A firm will succeed only if it takes a

proactive (anticipatory) stance toward change
1-32

Strategic issues usually have multifunctional or multibusiness consequences.
Strategic decisions have complex
implications for most areas of the Company Decisions about customer mix, competitive emphasis, or organizational structure involve a number of the firms SBUs, divisions, or program units
1-33

Strategic issues require considering the firms external environment
All businesses exist in an open system.
They affect and are affected by external conditions that are largely beyond their control
Successful positioning requires that

strategic managers look beyond operations
1-34
Three Levels of Strategy
Corporate level: board of directors,

CEO & administration [Highest]
Business level: business and corporate

managers [Middle]
Functional level: Product, geographic,

and functional area managers [Lowest]
Levels of Strategic Management
1-36
Benefits of Strategic Management
Managers at all levels interact in planning and

implementing strategy Similar to participative decision making Assessing strategy formulation requires looking at nonfinancial evaluations as well as financial ones Promoting positive behavioral consequences enables achievement of financial goals
1-37
Strategic Management Process
Businesses vary in formulation and other

processes The basic components of the models used to analyze strategic management are similar Strategic management is a processa flow of information through interrelated stages of analysis towards the achievement of organisational goals
Components of Strategic Management Model Internal Analysis Company Mission Strategic Analysis & External Analysis Choice Long-Term Objectives Generic & Grand Short-Term Objectives Strategies Policies Empowering Functional Tactics Action Restructuring, Strategic Control & Reengineering &
Continuous Improvement Refocusing
1-38
Components of Strategic Management Process

STRATEGY FORMULATION Existing Business Model
Mission , Vision, Values & Goals

External Analysis: Opportunities & Threats SWOT Strategic Choice Functional Level Strategies Business - Level Strategies Global Strategies Corporate Level Strategies Internal Analysis: Strengths & Weaknesses
FEEDBACK
STRATEGY IMPLEMENTATION
Governance and Ethics Designing Organization Structure Designing Organization Culture Designing Organization Controls
Strategic Purpose
Organization Core Philosophies

Vision Statement
An inspiring statement of what the organization

intends to become and to achieve in the future What we want to be The statement incorporates our Beliefs Should project a compelling story about the future (E.g. Steve Jobs : An Apple on Every Desk) Is culture-specific :Simply put, the vision could state what the founder ultimately envisions the business to be in terms of growth, values, employees, contribution to society, etc
1-42
What is a Company Mission?

Company Mission:
A broadly framed but enduring statement of a firms intent. It is the unique purpose that sets a company apart from others of its type and identifies the scope of its operations in product, market, and technology terms.

Mission Statement
Spells out how we see ourselves fulfilling our ideas of What we want to be in broad terms
Describes the overall purpose of the organization Is an organizations vision translated into written form- spelling in concrete terms the leaders view of the direction and purpose of the organization
What do we do? How do we do it? For whom do we do it?
1-44
The Need for an Explicit Mission
Why is this firm in business? What are our economic goals? What is our operating philosophy in terms of
quality, company image, and self-concept? What are our core competencies and competitive advantages? What customers do and can we serve? How do we view our responsibilities to stockholders, employees, communities, environment, social issues, and competitors?
1-45
Formulating a Mission
The typical business begins with the beliefs,

desires, and aspirations of a single entrepreneur These beliefs are usually the basis for the companys mission As the business grows or is forced to alter its product, market, or technology, redefining the company mission may be necessary
1-46
Mission Statement Components

Customer-market Product-service Geographic Domain Technology Concern for Survival Philosophy Self-concept Concern for Public Image
Inputs to the Development of Company Mission
1-47

Values
Both the mission and vision statements reside in a sea of values

Organizational beliefs respect for people, concern for individuals, approach to innovation, reward system, encouragement for Team work etc Describe what your Management Team really cares about what it holds dear (e.g. How do your managers respond to a trade-off between product quality and profit? Thats really a question of values.)
1-49
Perceived Stakeholders
Customers Government Stockholders Employees Society
Corporate Social Responsibility

Internal Aspects Employee welfare Working conditions Job design Intellectual property External Aspects Environmental issues Products Markets and marketing Suppliers Employment Community activity Human rights
1-51
Types of Social Responsibility
Economic the duty of managers, as agents of the company owners, to maximize stockholder wealth Legal the firms obligations to comply with the laws that regulate business activities Ethical the companys notion of right and proper business behavior
Corporate Governance
The governance framework
whom the organisation serves how the purposes and priorities should be decided how an organisation should function
how power is distributed among stakeholders
The New Corporate Governance Structure
1-53
Environmental Scanning
1-55
Firms External Environment
1-56
Layers of the business environment
Macroenvironment PESTEL (1)
1-57
Macroenvironment PESTEL
Political
Government stability Taxation policy Foreign trade regulations Social welfare policies
Economic
Business cycles GNP trends Interest rates Money supply Inflation Unemployment Disposable income
Sociocultural
Population demographics Income distribution Social mobility Lifestyle changes Attitudes to work and leisure Consumerism Levels of education
Technological
Government spending on research Government and industry focus on technological effort New discoveries /developments Speed of technology transfer Rates of obsolescence
Environmental
Environmental protection laws Waste disposal Energy consumption
Legal
Competition law Employment law Health and safety Product safety
Porters Five Forces Model
Risk of Entry by Potential Competitors Threat of Sustitutes Bargaining Power of Buyers
Bargaining Power of Suppliers Industry / Competitive Rivalry
The Five Forces Framework
Five Forces Analysis

The threat of entry ...
Dependent on barriers to entry such as:
economies of scale capital requirements of entry access to supply or distribution channels customer or supplier loyalty experience expected retaliation legislation or government action differentiation

Threat of substitutes
Reduction in demand for products as customers switch to alternatives:
Product for product substitution
e.g. email for post
substitution of need
e.g. reliable and cheap appliances reduce need for maintenance services
generic substitution
competition for household income, e.g. cars versus holidays doing without

Buyer power is likely to be high where there is / are:
a concentration of buyers many small operators in the supplying industry alternative sources of supply low switching costs components/materials that are a high percentage of cost to the buyer leading to shopping around a threat of backward integration

Supplier power is likely to be high where there is / are:
a concentration of suppliers customers that are fragmented and bargaining power low high switching costs powerful supplier brand possible integration forward by the supplier

Competitive Rivalry is likely to be high when:
competitors are in balance there is slow market growth (product life cycle) there are high fixed costs in an industry there are high exit barriers markets are undifferentiated
Competitive rivals are organisations with similar products and services aimed at the same customer group = direct competitors
The SWOT Matrix
Opportunities in business environment not being

fully exploited by the competition:
Strategic Gaps
substitute industries other strategic groups or strategic spaces the chain of buyers complementary products and services new market segments markets developing over time
Strategic Capability
Strategic capability is the adequacy and suitability of the resources and competences of an organisation for it to survive and prosper Resources
Tangible resources physical assets of an organisation Intangible resources non-physical assets of an organisation
Competences
The activities and processes through which an organisation deploys its resources effectively
Resources
Physical resources
Machines, buildings, production capacity
Financial resources
Capital, cash, debtors/creditors, suppliers of money (shareholders, bankers etc)
Human resources
Number and mix of people, skills and knowledge
Intellectual capital
Patents, brands, business systems, customer databases, goodwill
Competences
How an organisation employs and deploys

its resources
Efficiency and effectiveness of physical,

financial, human and intellectual resources
How they are managed Cooperation between people Adaptability Innovation Customer and supplier relationships Learning
Resource-based View of Strategy

Competitive advantage derives from the distinctiveness of an organisations capabilities
compared with others in the same industry Their resources or competences permit
production at lower cost or generation of superior product or service at standard cost
Some businesses achieve extraordinary profits
The Experience Curve
Implications of the Experience Curve
Growth not optional

Longer experience means lower costs Threat of competitors gaining cost advantages
Real unit costs should decline each year
First mover advantage can be important

Accumulated experience
Implications of the Experience Curve (contd)

But
Sustained competitive advantage unlikely due to unachievable market share
Therefore
Cost reduction becomes a threshold competence Outsourcing may become appropriate
Strategy Development
The Dynamics of Paradigm Change
Source: Adapted from p. Grinyeh and J.-C. Spender, Turnaround: Managerial recipes for strategic success, Associated Business Press, 1979, p. 203.
Exhibit 11.5
Different Processes of Strategy Development in Multiple forms & in different contexts
There is no one right way in which strategies are

developed (Eg: Fast changing environment Vs slow changing environment)
Processes of strategy development differ over time

and in different contexts
Different Processes of Strategy Development in Multiple forms & in different contexts (contd.)
Perceptions of how strategies develop will be seen

differently by different people (Senior Executives / Middle Management / Public Sector)
It is likely that no one process describes strategy
development in any organisation normally there are multiple processes at work
Intended and Emergent Strategies
Intended Strategy is an expression of desired strategic

direction deliberately formulated or planned by Managers
Implies that the Intended Strategy is also planned in terms of resource allocation, control systems, organisational structure etc
Emergent Strategy comes about through day-to-day routines,

activities and processes in an organisation
The Routine activities, though not direct, have a significant role in the development of strategy
Intended Processes of Strategy Development

Strategic Planning Systems
A form of systematised, step-by-step, chronological

procedures involving different Functions / Departments of the Organisation
Starting point is a set of guidelines / assumptions about the

external environment (price levels / supply status etc)
Plans drawn up by various businesses / divisions and passed

on to the Corporate level
Strategic Planning Systems(contd.)
Corporate Plan resulting from the aggregation of business plans
A number of financial / strategic targets are drawn up to

provide a basis for performance monitoring
There could be minor variations while drawing up the plans

in different organisations
Strategic Planning Systems Advantages / Uses
It provides a structured means of analysis and thinking about complex problems Encourages managers to question and challenge the current wisdom
Encourages a long term view of organisational strategy (Eg: in the case of FMCG sector 5 to 7 years)
Provides a means of coordination (between various businesses) It communicates intended strategy from the TOP
A Strategic Planning Cycle
Strategic Planning
Emergent Processes of Strategy Development

Logical Incrementalism
Is the development of strategy by experimentation and

learning from partial commitments rather than through global formulations of total strategies
Managers have a generalised rather than specific view of

where they want the organisation to be in future
Effective Managers try to be sensitive to environmental signals

through constant scanning and test changes in strategy in small scale steps
Logical Incrementalism (contd.)
Commitment to strategic options may be tentative in the early stages of strategy development Experiments through subsystems (people involved in product development / product positioning / diversification etc) building on the experience gained in that business Top managers utilise a mix of formal / informal / social and political processes to draw an emerging pattern of strategies from these subsystems
Logical incrementalism is a conscious, purposeful, proactive, executive practice to improve available information and build peoples identification with the strategy development
Logical Incrementalism

Source : Strategies for Change: Logical Incrementalism ( By James B. Quinn) A Management philosophy for achieving broad organisational goals Enables making strategic decisions in small steps Small steps attempt to resolve conflicting views of participants Reduces Risk by capitalizing on knowledge that is gained during the process Logical incrementalism has the advantage of flexibility / but likely to be time-consuming and inefficient
Externally Imposed Strategy
Imposition of strategy by powerful external stakeholders Mainly Government / Regulatory Bodies exercising norms / stipulations (Eg: Privatisation)
MNCs being advised for Joint Ventures / local alliances

Imposed strategy is designed outside the organisation
Imposed strategy to be implemented might entail large capital expenditure. (Eg: In Paper Mills: Capex on Production Machinery Vs Recycling / Pollution Control Machinery)
Strategy Development Additional Issues Managers Face

The challenge of Strategic Drift
Strategies over a period of time progressively

fail to address the strategic position of the company and performance deteriorates
There are strong forces at work that are likely to

push organisations towards this pattern
Strategy Development Additional Issues Managers Face

The challenge of Strategic Drift (contd.)
Incremental strategic change is a natural outcome of the influence of organisational culture, collective experience, political processes and prior decisions
Strategic drift results ultimately in a complacent organisation
Challenges for Strategy Development
Strategic drift
Incremental strategic change influenced by
organisational culture individual and collective experience political processes prior decisions
Risk of getting out of line with faster changes in environment Need to encourage challenge and change of core assumptions
Learning organisation
The Learning Organisation
Traditionally, organisations are seen hierarchies and bureaucracies set up to achieve objectives and maintain control Structures convey stability rather than change
A learning organisation is the one that is capable of continual regeneration from the variety of knowledge, experience and skills of individuals within a culture which encourages mutual questioning
A learning organisation is the one where the collective knowledge of all individuals in a company normally exceeds what the organisation itself knows and is capable of doing
The Learning Organisation (contd.)
Formal organisational structures stifle organisational knowledge and creativity
Organisations need to look at themselves as social networks
Managers need to play a less directive and more facilitative role
A learning organisation is the one inherently capable of change and with a capacity for organisational learning
Uncertain and Complex Conditions Strategy Development

A major problem of strategic management coping with uncertainty Environments differ in their form and complexity Simple / Static conditions the environment is relatively straight forward to understand and does not undergo significant change (Eg. Mass production companies / Raw Material Suppliers) All Companies end up following same strategy results in high degree of competition / low margins Dynamic conditions Managers need to consider environment of the future / not of the past
Uncertain and Complex Conditions Strategy Development (contd.)
Companies resort to scenario planning for making sense of the future
Emphasis should be to encourage individuals and groups to be forward thinking and intuitive
In complex situations an environment is difficult to comprehend
Coupled with dynamic conditions the environment is a combination of complexity and uncertainty
Strategy Development in Environmental Contexts
Exhibit 11.8
Managing Strategy Development Processes

Organisation needs different processes for different purposes What is the right emphasis at a given time? What is the role of top management? What are the strategy development roles at different organisational levels? Do the different managerial levels acknowledge and value different roles?
Strategy Development Processes
Exhibit 11.1
Strategy Development Routes
Strategic Leadership
Change Agent
Individual or group that effects strategic change
in an organisation
The process of influencing an organisation in its

efforts towards achieving an aim or goal
Charismatic leaders
Instrumental or transactional leaders

Strategic Leadership
Good leaders of the strategy-making process have a number of key attributes:
Vision, eloquence, and consistency Articulation of the business model Commitment Being well informed Willingness to delegate and empower The astute use of power Emotional intelligence: self-awareness, selfregulation, motivation, empathy, social skills

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BUSINESS STRATEGY - I

Scope of Discussions / Objectives

Introduction to Strategic Management

Customer Retention - Key Issues

More than 90 % of unsatisfied

It costs 5 times more to get a new

Customer Expectations / Desire

Dawn of a New Era ..

Large-scale, future-oriented plan Used to interact within competitive

business approaches used by managers to run the company

and please customers

out a market position successfully

the business targeted objectives

Exploring Corporate Strategy, Seventh Edition, Pearson Education Ltd 2005

Exploring Corporate Strategy, Seventh Edition, Pearson Education Ltd 2005

The Hows That Define a Firm's Strategy

How to manage each functional piece of the business and

develop needed organizational capabilities

Strategy and Operations

Exploring Corporate Strategy, Seventh Edition, Pearson Education Ltd 2005

Managers Strategic Thinking (Current Status & Future Prospects)

Contribution of Leading Management Gurus

Ansoff Matrix / Ansoff Grid

Provides four different growth strategies

Ansoffs Matrix and Risk

Market Penetration little risk involved

Market Development moderate risk

Ansoffs Matrix Use & Application

Saw strategic formulation as a delibrate and delicate process

Peter Druckers Contribution

Michael Porter : Strategy and Competitive Advantage

Dimensions of Strategic Decisions

Strategic decisions cover

areas of a firms operations

Usually only top management has

Dimensions of Strategic Decisions

Usually only top managers have

Dimensions of Strategic Decisions

They involve substantial allocations of

Strategic decisions commit the firm to

Dimensions of Strategic Decisions

In highly competitive firms, achieving

Dimensions of Strategic Decisions

Strategic decisions commit the firm for a

Once a Co., has committed itself to a

Dimensions of Strategic Decisions

Companies become known for what they

Dimensions of Strategic Decisions

They are based on what managers

Emphasis is on the development of solid

Dimensions of Strategic Decisions

A firm will succeed only if it takes a

Dimensions of Strategic Decisions

Strategic decisions have complex

Dimensions of Strategic Decisions

All businesses exist in an open system.

Successful positioning requires that

Three Levels of Strategy

Corporate level: board of directors,

Business level: business and corporate

Functional level: Product, geographic,

Levels of Strategic Management

Benefits of Strategic Management