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Notes on

Strategic Management

Notes on

Strategic Management
THREE BASIC TACTICS FOR A FIRM TO ESTABLISH THE STRATEGIC PLAN Strategic Plan: How to pursue the organizations long-term goals with resources expected to be available.
1.

Develop a vision and mission statement for the firm (Purpose or reason for existence) Establish objectives (Measurable results) Establish direction setting task for the firm

2. 3.

Vision: A strategic vision concerns a firms future business path where we want to go

MISSION: A mission statement focuses on current business activities--(Who we are?, What we do?, Purpose? and Why we exist?)
What to do: Understand clearly what business the firm is in: (a) Customer needs (what are being satisfied?) (b) Customer groups (who are being satisfied?) (c) Product services (through what?)

Decide when and where to change the firms mission: Periodically redefining mission is both common and necessary in an era of globalization and rapid change in the environment.

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Strategic Management
Communicate the mission among every level of the management of the firm in a clear, exciting, and inspiring manner.

OBJECTIVE: After setting the vision and mission then comes the objectives. It is more specific, which is extracted from the firms mission. It is expressed both in qualitative and quantitative form. It basically deals with: (a) How much to do ? (b) What kinds of performances to do ? (c) When to do ? Example: 10% INCREASE IN PROFIT. SET OBJECTIVE OF 10% RATE OF RETURN ON INVESTMENT PORTFOLIO OF A BANK. DIRECTION SETTING TASK: (STRATEGIES) After setting objectives, the direction setting task comes. It means who should do what task and when to accomplish the objectives of the firm. It includes four types of strategy; generally deal with four different individuals/groups of people. CORE COMPETENCY: Core competency refers to a unique strength that allows a company to achieve superior efficiency, quality, innovation, or customer responsiveness. Examples: GP customer service, SCB and Honda Motor Co. STRATEGIC BUSINESS UNIT (SBU): SBUs are those departments which are created based on similar products or services like Unilever Products. A division may be organized as Strategic Business Unit around a group of similar products, such as house wares of electric turbines. Top management usually treats an SBU as a semi-autonomous unit with,

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Strategic Management
generally, the authority to develop its own strategy within corporate objectives and strategy.

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Strategic Management
These are: (Hierarchy of Strategy)
Strategies Corporate Strategy Business Strategy Functional Strategy Operating Strategy Global Strategy International Strategy Concern Individual/Group CEO Head of SBUs Functional Manager Field Level Manager Top management Local office top management

Some Important Points:


(a)

The overall guidance for each of these strategies for each of these strategies comes from the TOP MANAGEMENT of the firm. (Top-down strategic planning)

(b)

Another approach is bottom-up strategic planning, in which the strategy formulation process is initiated by strategic proposals from divisional or functional units.

(c)

Each of these strategies should be cost effective and should be according to the MAXI-MINI game. It means maximum output by minimum input. (Recall guest lecture; total cost management from every corner of an organization, e.g. process + production)

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Strategic Management
FOUR APPROACHES TO FORMULATE A FIRMS STRATEGY
(a) The Master Strategy Approach: It is a bureaucratic approach in which decision is being taken with out any consultation. (b) The Delegate it to Approach: It is like, do your job, I will do my job. You cannot go beyond your level. It is suitable for government organizations and small firms.
(c)

The Collaborative Approach: MBO (Management by Objectives) sort of management, where all levels of manager sit together and make the plan by discussion as well as implement the plan together. MBO is a comprehensive management system based on measurable and participatively set objectives.

(d)

The Championship Approach: In this approach the CEO is interested neither in crafting the detail strategy nor the implementation of it. Rather management encourages the subordinates to develop championship strategy in specific fields and formulate and implement strategy by them. In this approach he/she himself/herself will act as the judge/ evaluator of the strategy. It suitable for the big organizations like Square, Unilever etc, which has many SBUs. (Strategic Business Units)

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Strategic Management
Formulation of Generic and Grand Strategies
Generic Strategies
Cost Leadership: For achieving this as a form of generic strategy the following skills and requirements as well as the following organizational requirements are required: Skills and Requirements Sustained capital investment and access to capital Process engineering skills Close laboratory supervision Efficient production design Low cost distribution channel Organizational Requirements Tight cost control Effective organizational structure Strict quantitative targets

Differentiation: For achieving this as a form of generic strategy the following skills and requirements as well as the organizational requirements are required: Marketing Abilities R & D skills Engineering skill Reputation on quality Technological leadership Organizational Requirements Strong cooperation among the different functional areas of the organization Good organizational culture, Creative people etc.

Involvement of risks in Cost Leadership:

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Strategic Management
Cost leadership does not sustain when,

Competitors imitate the product Technological change occurs Poor or no investment in HRD Fail to design the product effectively Fail to meet the quality standard

Involvement of risks in Differentiation:

Basis of supervision become less important to the buyers Competitors imitate the product

Michael Porters Generic Strategies:


Michael Porter, A Harvard University economist and an authority on business-level strategy, developed three generic strategies. These are:

1. Striving for overall low cost leadership in the industry:


By this strategy, firms are able to use their cost advantages to charge low price, enjoy higher profit, defend itself in the price ware, attack competitors on price to gain market share. In short, the organization has the ability to design, produce, and market a comparable product more efficiently than its competitors. It is a low cost competitive strategy that aims at broad mass market. Examples: Shah Cement, Apple Computers.

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Strategic Management
FIGURE 7.1 Porters Generic Competitive Strategies

Competitive Advantage

Competitive Scope

Lower Cost

Differentiation

Board Target

Cost Leadership

Differentiation

Narrow Target

Cost Focus

Focused Differentiation

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Strategic Management
2. Striving to create and market unique products for varied
customer groups differentiation: (Mass Market)
In contrast to low cost strategy, creates appeal to the customers with the sensitivity of products characteristics, in terms of product quality, special features, or after-sale service. By this it builds customer loyalty, and can charge extra price for the product. (Unique) Example: Rolex watch, Mercedes-Benz automobiles.

3. Striving to have special appeal to one or more groups of


customers by cost focus and focused differentiation : (Narrow Market)
Satisfying the needs of a particular buyer group, with special financing, inventory, or service with a low cost. Example: Sugar substitutes for diabetic patients, Industrial papers, diet Coke/Pepsi.

Grand Strategies:
Working from the mission statement, top management formulates the organizations grand strategy, a general explanation of how the organizations mission is to be accomplished. Porters three generic strategies are particularly useful at this point. Example: IBMs strong emphasis on cost control and targeting of the entire computer market is a grand strategy based on Porters low cost leadership generic strategy. It should be remembered that grand strategies are not drawn from thin air. They are derived from a careful situational analysis (SWOT analysis) or the organization and its environment.

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Strategic Management
1. Concentrated Growth: The firm that directs its resources to the
profitable growth of a single product in a single market with single dominant technology. Example- Mobil.

2. Market Development: Marketing of present products often with


only cosmetic modification to the customer in related market areas by adding channels of distribution or by changing the content of advertising or promotion. Example- Unilever products, Wheel, Lifebuoy etc.

3. Product Development: The substantial modification of existing


products or the creating of new but related product that can be marketed to current and new customers through established channels. Example- Square consumer products like Redhuni brand & Unilever brands.

4. Innovation: Periodic Change and improvements in the products. 5. Horizontal Integration / Acquisition and Merger: Strategy
based on the acquisition of one or more similar firms operating at the same stage of production marketing chain. Example- SCBs acquisition of AmEx.

6. Vertical Integration: Strategy is to acquire firms that supply


inputs or are a customer for the outputs. Bata Shoe Companys buying of one of its chemical suppliers.

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Strategic Management
7. Concentric Diversification: Diversification represents distinctive
departures from a firms existing base of operations, typically the acquisition of internal generation of a separate business with synergetic possibilities for counter balancing the strengths and weaknesses of the two businesses. Example:

8. Conglomerate diversification: Acquire a business that represent


the most promising investment opportunity available.

9. Multinational Diversification: Diversification of the business


beyond the national market.

10. Turnaround: It focuses on turning money-losing businesses to


profitability rather that diversity by cost and asset reduction.

11. Retrenchment: It focuses on the reduction of the scope of


diversification to a smaller number of businesses. It means concentrate on a few core businesses.

12. Restructuring: It involves radical surgery on the mix and


percentage make up of the type of business in the portfolio.

13. Divestiture: The sale of the firms business or a major component


of the business.

14. Liquidation: The firm typically sold in parts only occasionally as


a whole but for its tangible asset value.

15. Strategic Alliance: Here companies involved do not make an


equity position in one another. It is synonymous with licensing agreements. It may also involve in the transfer of some industrial property right from one to another licensor to motivate licensee in a foreign county and so on. Example- Mobil + Jamuna.

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Strategic Management

THE STRATEGY FORMULATION MODEL


Basic idea is: Situation of a business is defined in terms of the growth rate of the general market and the firms competitive position in that market. In this situation, a business can divide into four, situations. These are:
Rapid

Concentrated growth Vertical Integration Concentric diversification


Strong

R efo rm u latio n o f C o n cen trated g ro w th


Horizontal integration Divestiture Liquidation

1 3

2 4

Weak

Concentric Diversification Conglomerate Diversification Joint Venture

Turnaround Concentric Diversification Conglomerate Diversification Liquidation


Slow

Figure: Different strategic situations and their respective strategies. 1.


2.

Strong competitive position in a rapidly growing market. Weak position in a rapidly growing market. Weak position in a slow growing market. Strong position in a slow growing market.

3. 4.

In these four situations stated above, different strategies can be taken.

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Strategic Management

When Turnaround, Restructuring, and Retrenchment strategies should be taken

Firms long-term business and performance prospects become unattractive Joining of a new CEO (Triggering Effect) New technology and product emerges Have unique opportunity to do a new business

When divestiture and liquidation strategies should be taken

With the change of time when long-term industry attractiveness


changes and make a good diversification move into an attractive industry.

Lack of sensible strategic fit: Business becomes culturally unfit


and valueless in the society.

When a business loses its appeal among the customers.

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Strategic Management

Strategies for competing in the emerging industry


Challenges:
1. 2. 3. 4. 5. Market is new and unproven Technology tends to be proprietary and closely guarded Relatively low entry barrier Little information about the market and customer Higher buyer expectation

Strategic Choices:
1. 2. 3. 4. 5. Take entrepreneurial strategy Increase technology and product quality Search new customer group Advanced design and advertisements Use price cut and increase the quality

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Strategic Management

Strategies for competing during the transition to industry maturity

Challenges:
1. 2. 3. 4. Head to head competition Sophisticated buyer Competition on cost and services Profitability may decreased because of the competition

Strategic Choices:
1. 2. 3. 4. 5. Extend product line Emphasize on product innovation Cost cut Vertical integration Horizontal integration

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Strategic Management

Strategies for industry leaders:


1. Stay on the offensive strategy: Relentless pursuit of continuous innovations and improvements. (Nokia Mobile) Fortify and defense strategy: To make the new entry tougher than before through increase services quality, advertisements, and R&D etc. Follow the leader strategy: To enforce and unwritten tradition that smaller firms should follow the industry leader in adjusting price change or anything.

2.

3.

Strategies for runner-up firms:


1.

Vacant niche strategy: Concentrate on customers or the end-users that major firms have by-passed or neglected. (Sony Eriksson sports mobile) Specialist strategy: Try to be the specialist in specific areas. Our one is better than their one strategy: It focuses on the quality or/and performance.

2. 3.

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Strategic Management

Strategies for the weak firms


1. 2. 3. 4. Boosting revenue Cutting cost Selling of assets Combination of the above three

Techniques of strengthening the competitive position and develop distinctive competence

Do not allocate resources as the competitors do. Make use of the technology and other strengths, of those products, which are not directly competing with the competitors to avoid head to head competition. Challenge accepted assumptions about the way business is done or nature of the products, or process and gain advantage by creating new success factors Innovate something new that is absolutely new to the market and promising. (Lafarge)

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Strategic Management

Identify time how long a strength or weakness will remain because competitors may start to key on the factor or time can make it obsolete.

Four questions should be asked to determine the TIME: 1.


2. 3. 4.

What does the firm do particularly well ? Do these competencies count and if so, when? What does the firm do poorly? Does it matter?

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Strategic Management

Strategy Implementation
Before developing a plan/strategy, the firm has to consider whether it has the strengths to implement the strategies properly that it is going to formulate. To implement, any plan/strategy, the following 7s should be considered. There are: 1. 2. 3. 4. 5. 6. 7. Strategy itself. Structure (Organizational Structure) Staff (Human Resource) System (Organization system like reward and punishment) Style (Leadership) Skill (Technology and other skill) Stared Value (Culture)

Strategy:
It has been discussed earlier.

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Strategic Management

Structure:
It deals with the internal environment of the organization, its long-term objectives, and firms physical structure (organ gram: whether it is centralized, decentralized) ASK: Is the organizational structure compatible with the planning process, with new managerial approaches, and with the strategy itself.

Strategic principles for effective organization structure:


1. 2. 3. Unity of command Scalar principle and unity of command Adequate distribution of power and authority

Staff: (People)
It deals with the available human resources and their competencies. Are people with right skills and abilities available for key assignments, or must attention be given to recruiting, training, management development and similar programs.

System:
It deals with the overall mechanism of the organization and reward is one of the most important issues to be considered here.

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Strategic Management

There are three types of reward. These are: 1. 2. 3. Short term reward Mid term reward Long term reward

Strategic issues related to rewarding:


1. 2. 3. Timing Term Relation of reward with the performance

Strategic way of rewarding:


In rewarding the first thing is situation analysis. Then reward and assimilate with goals or output. Reward 2/3 reward should be fixed Goal of Output 1/3 reward should be variable

Analysis of Situation

Skill:
It deals with the technology and other requirements (technical & managerial skills) for the smooth operation of the business.

Style:
It deals with the leadership that will lead the firm to achieve it goals.

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Strategic Management

Leaders give organizations a sense of direction for where the organization should go. Moreover, they are eloquent enough to be able to communicate the vision and mission to others within the organization in terms that can energize motivate people, and they consistently articulate their vision and mission until it becomes the part of organizations culture. For achieving a good style of the firm, the leader of the firm should posses some qualities. There are: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Visionary Willingness to delegate and empower Team player Good educational background Ability to convince people Have experience Good personality Courage (Risk taker, Boldness) Integrity (Consistency, Realistic/ by winning) Strategic thinker (Crisis Anticipation) Tolerance to the ambiguity

Shared Value:
It deals with the culture of the firm. Culture is not only values. It is a kind of rules and regulations. Values cannot be changed. But it can be upgraded. Rules and regulations can be changed.

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Strategic Management
Two type of culture is very important to the firm Organizational culture Corporate culture

Organizational Culture:
Changes in key organizational factors that are necessary to implement the new strategy Many Link changed to basic mission and fundamental organizational norms. Few Synergetic focus on reinforcing culture High Reformulate strategy or prepare carefully for LT. difficult Changes. Managing around the culture Low

Figure: Managing the Strategy-Culture Relationship.

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Strategic Management
Corporate Culture:
Companys inner values, beliefs, rituals, operation style, political and social atmosphere etc.

Strategic Principle:
A strong culture and tight strategy-culture fit are powerful levers for influencing people to do their jobs better.

Strategic Action related with culture:


1. 2. 3. 4. Creating a fit between the culture and the strategy Symbolic action and substantive action Establishing ethical standards and values Building a spirit of high performance

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Strategic Management
Strategic Control (Evaluation + Feedback)
It means: Taking a strategy as it is being implemented, detecting
problems of changes in its underlying premises, and making necessary adjustments.

Type of Strategic Control:


1.

Premise control: It is designed to check systematically and continuously whether the premises (assumptions and predictions) on which the strategy is based are still valid.

Which premises should be monitored?


Environmental factors Industrial factors Implementation control: It is designed to Asses whether the overall strategy should be changed in light of the result associated with the actions that implement the overall strategy.

2.

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Strategic Management
Types:
Monitoring Strategic Thrust Milestone review 3. Strategic surveillance: It is designed to monitor a board range of events inside and outside the firm that are likely to affect the course of its strategy. 4. Special alert control: Reconsideration of the firms strategy because of the sudden, unexpected events.

Operation Control:
Set Standard of performance Measure actual performance Identify deviations form the standards Initiate corrective actions