The Strategic Planning Process An overview of the strategic planning process including mission statement, environmental scan, strategy

formulation, implementation, and control.

Business Vision and Mission Statement Uses a framework proposed by Collins and Porras to describe three components of business vision including core values, core purpose, and visionary goals.

Hierarchical Levels of Strategy Describes the role of strategy at the corporate level, business unit level, and functional or department level of the firm.

PEST Analysis How a PEST analysis fits into the environmental scan. Provides some examples of the political, economic, social, and technological factors of the external macro

environment.

SWOT Analysis The role of SWOT analysis (strengths, weaknesses, opportunities, and threats) in strategic planning, including an overview of the TOWS matrix. Competitive Advantage Explains the concept of competitive advantage, using a diagram to illustrate how distinctive competencies and positional advantages create superior value.

Porter's Five Forces Discusses the five forces, including rivalry, the threat of substitutes, buyer power, supplier power, and barriers to entry.

Porter's Generic Strategies Introduces the three generic strategies of cost leadership, differentiation, and focus. Discusses issues related to multiple strategies, and compares the three strategies with respect to their ability to defend against the five industry forces.

Value Chain Analysis The value chain as proposed by Porter. Describes value-creating primary and support activities and how value chain analysis can be useful in developing a competitive advantage.

Vertical Integration The benefits and drawbacks of vertical integration, situational factors influencing the decision, and alternatives to vertical integration.

Horizontal Integration The concept of horizontal integration, its advantages, and pitfalls.

Ansoff Matrix Igor Ansoff's product-market matrix for corporate growth. Presents some considerations for selecting the optimal growth strategy.

BCG Growth-Share Matrix Describes the portfolio planning matrix that classifies business units as Cash Cows,

Stars, Question Marks, and Dogs.

GE / McKinsey Matrix The GE / McKinsey portfolio matrix, including some factors that contribute to industry attractiveness and business unit strength.

Core Competencies A summary of C.K. Prahalad and Gary Hamel's concept of core competencies and implications for corporate management.

Global Strategic Management Discusses the sources of competitive advantage, the nature of competitive advantage in global industries, types of international strategy, analysis of global cost structures, globalization of service businesses, emerging economies, global knowledge management, and country management.

Porter's Diamond of National Advantage Diagram of Michael Porter's model of national advantage with explanations of the

individual points of the diamond framework and the diamond as a system, concluding with an example from the Japanese fax machine industry.

Foreign Market Entry Modes A summary and comparison of the four major modes of foreign market entry, including exporting, licensing, joint venture, and foreign direct investment.

Strategic management The term strategic management is used to refer to the entire scope of strategicdecision making activity in an organization. Strategic management as a concept has evolved over time and will continue to evolve. As result there are a variety of meanings and interpretations depending on the author and sources. For example, some scholars and practitioners the term strategic planning connote the total

strategic management activities. Moreover, sometimes managers use the terms strategic management, strategic planning, and long-range planning

interchangeable. Finally, some of the phrases are used interchangeably with strategic management are strategy and policy formulation, and business policy. To purpose of this thesis I use the terminology strategy management, as opposed to the more narrow term business policy. The following statements serve as a number of workable definitions of strategic management: Strategic management is the process of managing the pursuit of organizational mission while managing the relationship of the organization to its environment (James M. Higgins). Strategic management is defined as the set of decisions and actions resulting in the formulation and implementation of strategies designed to achieve the objectives of the organization (John A. Pearce II and Richard B. Robinson, Jr.). Strategic management is the process of examining both present and future environments, formulating the organization's objectives, and making, implementing, and controlling decisions focused on achieving these objectives in the present and future environments(Garry D. Smith, Danny R. Arnold, Bobby G. Bizzell).

Strategic management is a continuous process that involves attempts to match or fit the organization with its changing environment in the most advantageous way possible (Lester A. Digman).

The Strategic Planning Process: In today's highly competitive business environment, budget-oriented planning or forecast-based planning methods are insufficient for a large corporation to survive and prosper. The firm must engage in strategic planning that clearly defines objectives and assesses both the internal and external situation to formulate strategy, implement the strategy, evaluate the progress, and make adjustments as necessary to stay on track. A simplified view of the strategic planning process is shown by the following diagram:

The Strategic Planning Process

Mission & Objectives

Environmental Scanning

Strategy Formulation

Strategy Implementation

Evaluation & Control

Mission and Objectives The mission statement describes the company's business vision, including the unchanging values and purpose of the firm and forward-looking visionary goals that guide the pursuit of future opportunities. Guided by the business vision, the firm's leaders can define measurable financial and strategic objectives. Financial objectives involve measures such as sales targets and earnings growth. Strategic objectives are related to the firm's business position, and may include measures such as market share and reputation. Environmental Scan The environmental scan includes the following components:

Internal analysis of the firm Analysis of the firm's industry (task environment) External macro environment (PEST analysis)

The internal analysis can identify the firm's strengths and weaknesses and the external analysis reveals opportunities and threats. A profile of the strengths, weaknesses, opportunities, and threats is generated by means of a SWOT analysis An industry analysis can be performed using a framework developed by Michael Porter known as Porter's five forces. This framework evaluates entry barriers, suppliers, customers, substitute products, and industry rivalry. Strategy Formulation Given the information from the environmental scan, the firm should match its strengths to the opportunities that it has identified, while addressing its weaknesses and external threats. To attain superior profitability, the firm seeks to develop a competitive advantageover its rivals. A competitive advantage can be based on cost or differentiation. Michael Porter identified three industry-independent generic strategies from which the firm can choose. Strategy Implementation The selected strategy is implemented by means of programs, budgets, and procedures. Implementation involves organization of the firm's resources and motivation of the staff to achieve objectives.

The way in which the strategy is implemented can have a significant impact on whether it will be successful. In a large company, those who implement the strategy likely will be different people from those who formulated it. For this reason, care must be taken to communicate the strategy and the reasoning behind it. Otherwise, the implementation might not succeed if the strategy is misunderstood or if lower-level managers resist its implementation because they do not understand why the particular strategy was selected. Evaluation & Control The implementation of the strategy must be monitored and adjustments made as needed. Evaluation and control consists of the following steps: 1. Define parameters to be measured 2. Define target values for those parameters 3. Perform measurements 4. Compare measured results to the pre-defined standard 5. Make necessary changes

STRATEGIC VISION AND MISSION Though sounding clichd, Vision & Mission statement can do a lot to alignment. It is important that the same is worded and articulated in a way the people can relate to them and also find it linked to their job. Strategic Vision Statement What is a vision: Vision statement provides direction and inspiration for organizational goal setting. Vision is where you see yourself at the end of the horizon OR milestone therein. It is a single statement dream OR aspiration. Typically a vision has the flavors of 'Being Most admired', 'Among the top league', 'Being known for innovation', 'being largest and greatest' and so on. Typically 'most profitable', 'Cheapest' etc. dont figure in vision statement. Unlike goals, vision is not SMART. It does not have mathematics OR timelines attached to it. Vision is a symbol, and a cause to which we want to bond the stakeholders, (mostly employees and sometime share-holders). As they say, the people work best, when they are working for a cause, than for a goal. Vision provides them that

cause. Vision is long-term statement and typically generic & grand. Therefore a vision statement does not change unless the company is getting into a totally different kind of business. Vision should never carry the 'how' part of vision. For example ' To be the most admired brand in Aviation Industry' is a fine vision statement, which can be spoiled by extending it to' To be the most admired brand in the Aviation Industry by providing world-class in-flight services'. The reason for not including 'how' is that 'how' may keep on changing with time. Challenges related to Vision Statement: Putting-up a vision is not a challenge. The problem is to make employees engaged with it. Many a time, terms like vision, mission and strategy become more a subject of scorn than being looked up-to. This is primarily because leaders may not be able to make a connect between the vision/mission and peoples every day work. Too often, employees see a gap between the vision, mission and their goals & priorities. Even if there is a valid/tactical reason for this mis-match, it is not explained.

Horizon of Vision: Vision should be the horizon of 5-10 years. If it is less than that, it becomes tactical. If it is of a horizon of 20+ years (say), it becomes difficult for the strategy to relate to the vision. Features of a good vision statement:

Easy to read and understand. Compact and crisp to leave something to peoples imagination. Gives the destination and not the road-map. Is meaningful and not too open ended and far-fetched. Excite people and make them get goose-bumps. Provides a motivating force, even in hard times. Is perceived as achievable and at the same time is challenging and compelling, stretching us beyond what is comfortable.

Vision is a dream/aspiration, fine-tuned to reality: The Entire process starting from Vision down to the business objectives is highly iterative. The question is from where we should start. We strongly recommend that vision and mission statement should be made first without being colored by

constraints, capabilities and environment. This can said akin to the vision of armed forces, thats 'Safe and Secure country from external threats'. This vision is a nonnegotiable and it drives the organization to find ways and means to achieve their vision, by overcoming constraints on capabilities and resources. Vision should be a stake in the ground, a position, a dream, which should be prudent, but should be non-negotiable barring few rare circumstances. Mission Statement What is a mission: Mission of an organization is the purpose for which the organization is. Mission is again a single statement, and carries the statement in verb. Mission in one way is the road to achieve the vision. For example, for a luxury products company, the vision could be 'To be among most admired luxury brands in the world' and mission could be 'To add style to the lives' A good mission statement will be :

Clear and Crisp: While there are different views, We strongly recommend that mission should only provide what, and not 'how and when'. We would prefer the mission of 'Making People meet their career' to 'Making people

meet their career through effective career counseling and education'. A mission statement without 'how & when' element leaves a creative space with the organization to enable them take-up wider strategic choices.

Have to have a very visible linkage to the business goals and strategy: For example you cannot have a mission (for a home furnishing company) of 'Bringing Style to Peoples lives' while your strategy asks for mass product and selling. Its better that either you start selling high-end products to high value customers, OR change your mission statement to 'Help people build homes'.

Should not be same as the mission of a competing organization. It should touch upon how its purpose it unique.

Mission follows the Vision: The Entire process starting from Vision down to the business objectives, is highly iterative. The question is from where should be start. I strongly recommend that mission should follow the vision. This is because the purpose of the organization could change to achieve their vision. For example to achieve the vision of an Insurance company 'To be the most trusted Insurance Company', the mission could be first 'making people financially secure'

as their emphasis is on Traditional Insurance product. At a later stage the company can make its mission as 'Making money work for the people' when they also include the non-traditional unit linked investment products.

Hierarchical Levels of Strategy

Strategy can be formulated on three different levels:

corporate level business unit level functional or departmental level.

While strategy may be about competing and surviving as a firm, one can argue that products, not corporations compete, and products are developed by business units. The role of the corporation then is to manage its business units and products so that each is competitive and so that each contributes to corporate purposes. Consider Textron, Inc., a successful conglomerate corporation that pursues profits through a range of businesses in unrelated industries. Textron has four core business segments:

Aircraft - 32% of revenues

Automotive - 25% of revenues Industrial - 39% of revenues Finance - 4% of revenues.

While the corporation must manage its portfolio of businesses to grow and survive, the success of a diversified firm depends upon its ability to manage each of its product lines. While there is no single competitor to Textron, we can talk about the competitors and strategy of each of its business units. In the finance business segment, for example, the chief rivals are major banks providing commercial financing. Many managers consider the business level to be the proper focus for strategic planning. Corporate Level Strategy Corporate level strategy fundamentally is concerned with the selection of businesses in which the company should compete and with the development and coordination of that portfolio of businesses. Corporate level strategy is concerned with:

Reach - defining the issues that are corporate responsibilities; these might include identifying the overall goals of the corporation, the types of

businesses in which the corporation should be involved, and the way in which businesses will be integrated and managed.

Competitive Contact - defining where in the corporation competition is to be localized. Take the case of insurance: In the mid-1990's, Aetna as a corporation was clearly identified with its commercial and property casualty insurance products.

The conglomerate Textron was not. For Textron, competition in the insurance markets took place specifically at the business unit level, through its subsidiary, Paul Revere. (Textron divested itself of The Paul Revere Corporation in 1997.)

Managing Activities and Business Interrelationships - Corporate strategy seeks to develop synergies by sharing and coordinating staff and other resources across business units, investing financial resources across business units, and using business units to complement other corporate business activities. Igor Ans off introduced the concept of synergy to corporate strategy.

Management Practices - Corporations decide how business units are to be governed: through direct corporate intervention (centralization) or through more or less autonomous government (decentralization) that relies on persuasion and rewards.

Corporations are responsible for creating value through their businesses. They do so by managing their portfolio of businesses, ensuring that the businesses are successful over the long-term, developing business units, and sometimes ensuring that each business is compatible with others in the portfolio.

Business Unit Level Strategy A strategic business unit may be a division, product line, or other profit center that can be planned independently from the other business units of the firm. At the business unit level, the strategic issues are less about the coordination of operating units and more about developing and sustaining a competitive advantage for the goods and services that are produced. At the business level, the strategy formulation phase deals with:

positioning the business against rivals anticipating changes in demand and technologies and adjusting the strategy to accommodate them

influencing the nature of competition through strategic actions such as vertical integration and through political actions such as lobbying.

Michael Porter identified three generic strategies (cost leadership, differentiation, and focus) that can be implemented at the business unit level to create a competitive advantage and defend against the adverse effects of the five forces. Functional Level Strategy The functional level of the organization is the level of the operating divisions and departments. The strategic issues at the functional level are related to business processes and the value chain. Functional level strategies in marketing, finance, operations, human resources, and R&D involve the development and coordination of resources through which business unit level strategies can be executed efficiently and effectively. Functional units of an organization are involved in higher level strategies by providing input into the business unit level and corporate level strategy, such as providing information on resources and capabilities on which the higher level strategies can be based. Once the higher-level strategy is developed, the functional units translate it into discrete action-plans that each department or division must accomplish for the strategy to succeed.

PEST Analysis

A scan of the external macro-environment in which the firm operates can be expressed in terms of the following factors:

Political Economic Social Technological

The acronym PEST (or sometimes rearranged as "STEP") is used to describe a framework for the analysis of these macroenvironmental factors. A PEST analysis fits into an overall environmental scan as shown in the following diagram:

Environmental Scan / External Analysis / \ \ Internal Analysis

Macro environment | P.E.S.T.

Microenvironment

Political Factors Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate. Some examples include:

tax policy employment laws environmental regulations trade restrictions and tariffs political stability

Economic Factors

Economic factors affect the purchasing power of potential customers and the firm's cost of capital. The following are examples of factors in the macroeconomy:

economic growth interest rates exchange rates inflation rate

Social Factors Social factors include the demographic and cultural aspects of the external macro environment. These factors affect customer needs and the size of potential markets. Some social factors include:

health consciousness population growth rate age distribution career attitudes emphasis on safety

Technological Factors

Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions. Some technological factors include:

R&D activity automation technology incentives rate of technological change

External Opportunities and Threats The PEST factors combined with external micro environmental factors can be classified as opportunities and threats in a SWOT analysis. SWOT Analysis A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. As

such, it is instrumental in strategy formulation and selection. The following diagram shows how a SWOT analysis fits into an environmental scan: SWOT Analysis Framework

Environmental Scan / Internal Analysis /\ Strengths Weaknesses | SWOT Matrix \ External Analysis /\ Opportunities Threats

Strengths A firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include:

patents strong brand names good reputation among customers

cost advantages from proprietary know-how exclusive access to high grade natural resources favorable access to distribution networks

Weaknesses The absence of certain strengths may be viewed as a weakness. For example, each of the following may be considered weaknesses:

lack of patent protection a weak brand name poor reputation among customers high cost structure lack of access to the best natural resources lack of access to key distribution channels

In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment. Opportunities

The external environmental analysis may reveal certain new opportunities for profit and growth. Some examples of such opportunities include:

an unfulfilled customer need arrival of new technologies loosening of regulations removal of international trade barriers

Threats Changes in the external environmental also may present threats to the firm. Some examples of such threats include:

shifts in consumer tastes away from the firm's products emergence of substitute products new regulations increased trade barriers

The SWOT Matrix A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm's strengths and upcoming opportunities. In some cases, the

firm can overcome a weakness in order to prepare itself to pursue a compelling opportunity. To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is shown below: SWOT / TOWS Matrix

Strengths

Weaknesses

Opportunities

S-O strategies W-O strategies

Threats

S-T strategies W-T strategies

S-O strategies pursue opportunities that are a good fit to the company's strengths.

W-O strategies overcome weaknesses to pursue opportunities. S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats.

W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats.

Porter's Generic Strategies

If the primary determinant of a firm's profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns. A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These

strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent. The following table illustrates Porter's generic strategies:

Target Scope Low Cost

Advantage Product Uniqueness Cost Leadership Differentiation Strategy

Broad (Industry Wide)

Strategy

Focus Narrow (Market Segment) Strategy (low cost)

Focus Strategy (differentiation)

Cost Leadership Strategy This generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share. In the event of a price war, the firm can maintain some profitability while the competition suffers losses. Even without a price war, as the industry matures and prices decline, the firms that can produce more cheaply will

remain profitable for a longer period of time. The cost leadership strategy usually targets a broad market. Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. If competing firms are unable to lower their costs by a similar amount, the firm may be able to sustain a competitive advantage based on cost leadership. Firms that succeed in cost leadership often have the following internal strengths:

Access to the capital required to make a significant investment in production assets; this investment represents a barrier to entry that many firms may not overcome.

Skill in designing products for efficient manufacturing, for example, having a small component count to shorten the assembly process.

High level of expertise in manufacturing process engineering. Efficient distribution channels.

Each generic strategy has its risks, including the low-cost strategy. For example, other firms may be able to lower their costs as well. As technology improves, the

competition may be able to leapfrog the production capabilities, thus eliminating the competitive advantage. Additionally, several firms following a focus strategy and targeting various narrow markets may be able to achieve an even lower cost within their segments and as a group gain significant market share.

Differentiation Strategy A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product. Because of the product's unique attributes, if suppliers increase their prices the firm may be able to pass along the costs to its customers who cannot find substitute products easily. Firms that succeed in a differentiation strategy often have the following internal strengths:

Access to leading scientific research. Highly skilled and creative product development team.

Strong sales team with the ability to successfully communicate the perceived strengths of the product.

Corporate reputation for quality and innovation.

The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes. Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments.

Focus Strategy The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. The premise is that the needs of the group can be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly.

Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers. However, firms pursuing a differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not exist. Firms that succeed in a focus strategy are able to tailor a broad range of product development strengths to a relatively narrow market segment that they know very well. Some risks of focus strategies include imitation and changes in the target segments. Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product in order to compete directly. Finally, other focusers may be able to carve out sub-segments that they can serve even better.

A Combination of Generic Strategies - Stuck in the Middle? These generic strategies are not necessarily compatible with one another. If a firm attempts to achieve an advantage on all fronts, in this attempt it may achieve no advantage at all. For example, if a firm differentiates itself by supplying very high quality products, it risks undermining that quality if it seeks to become a cost

leader. Even if the quality did not suffer, the firm would risk projecting a confusing image. For this reason, Michael Porter argued that to be successful over the longterm, a firm must select only one of these three generic strategies. Otherwise, with more than one single generic strategy the firm will be "stuck in the middle" and will not achieve a competitive advantage. Porter argued that firms that are able to succeed at multiple strategies often do so by creating separate business units for each strategy. By separating the strategies into different units having different policies and even different cultures, a corporation is less likely to become "stuck in the middle." However, there exists a viewpoint that a single generic strategy is not always best because within the same product customers often seek multi-dimensional satisfactions such as a combination of quality, style, convenience, and price. There have been cases in which high quality producers faithfully followed a single strategy and then suffered greatly when another firm entered the market with a lower-quality product that better met the overall needs of the customers.

Generic Strategies and Industry Forces

These generic strategies each have attributes that can serve to defend against competitive forces. The following table compares some characteristics of the generic strategies in the context of the Porter's five forces.

Generic Strategies and Industry Forces

Industry Force Cost Leadership Ability to cut

Generic Strategies Differentiation Focus

Customer loyalty can Entry price in retaliation discourage potential Barriers deters potential entrants. entrants. Large buyers have less Ability to offer Buyer lower price to Power powerful buyers. alternatives. Supplier Better insulated Power from powerful Better able to pass on supplier price increases because of few close power to negotiate

Focusing develops core competencies that can act as an entry barrier.

Large buyers have less power to negotiate because of few alternatives.

Suppliers have power because of low volumes, but a

suppliers.

to customers.

differentiation-focused firm is better able to pass on supplier price increases.

Customer's become Can use low price attached to Threat of to defend against differentiating attributes, competency protect against Substitutes substitutes. reducing threat of substitutes. Rivals cannot meet Better able to Rivalry compete on price. customers from rivals. customer needs. Brand loyalty to keep differentiation-focused substitutes. Specialized products & core

The Value Chain

To analyze the specific activities through which firms can create a competitive advantage, it is useful to model the firm as a chain of value-creating activities. Michael Porter identified a set of interrelated generic activities common to a wide range of firms. The resulting model is known as the value chain and is depicted below:

Primary Value Chain Activities

Inbound > Operations > Logistics

Outbound > Logistics

Marketing > Service & Sales

The goal of these activities is to create value that exceeds the cost of providing the product or service, thus generating a profit margin.

Inbound logistics include the receiving, warehousing, and inventory control of input materials.

Operations are the value-creating activities that transform the inputs into the final product.

Outbound logistics are the activities required to get the finished product to the customer, including warehousing, order fulfillment, etc.

Marketing & Sales are those activities associated with getting buyers to purchase the product, including channel selection, advertising, pricing, etc.

Service activities are those that maintain and enhance the product's value including customer support, repair services, etc.

Any or all of these primary activities may be vital in developing a competitive advantage. For example, logistics activities are critical for a provider of

distribution services, and service activities may be the key focus for a firm offering on-site maintenance contracts for office equipment. These five categories are generic and portrayed here in a general manner. Each generic activity includes specific activities that vary by industry. Support Activities The primary value chain activities described above are facilitated by support activities. Porter identified four generic categories of support activities, the details of which are industry-specific.

Procurement - the function of purchasing the raw materials and other inputs used in the value-creating activities.

Technology Development - includes research and development, process automation, and other technology development used to support the valuechain activities.

Human Resource Management - the activities associated with recruiting, development, and compensation of employees.

Firm Infrastructure - includes activities such as finance, legal, quality management, etc.

Support activities often are viewed as "overhead", but some firms successfully have used them to develop a competitive advantage, for example, to develop a cost advantage through innovative management of information systems. Value Chain Analysis In order to better understand the activities leading to a competitive advantage, one can begin with the generic value chain and then identify the relevant firm-specific activities. Process flows can be mapped, and these flows used to isolate the individual value-creating activities. Once the discrete activities are defined, linkages between activities should be identified. A linkage exists if the performance or cost of one activity affects that of another. Competitive advantage may be obtained by optimizing and coordinating linked activities. The value chain also is useful in outsourcing decisions. Understanding the linkages between activities can lead to more optimal make-or-buy decisions that can result in either a cost advantage or a differentiation advantage. The Value System The firm's value chain links to the value chains of upstream suppliers and downstream buyers. The result is a larger stream of activities known as the value

system. The development of a competitive advantage depends not only on the firmspecific value chain, but also on the value system of which the firm is a part. The Value Chain http://www.netmba.com/strategy/value-chain/ To better understand the activities through which a firm develops a competitive advantage and creates shareholder value, it is useful to separate the business system into a series of value-generating activities referred to as the value chain. In his 1985 book Competitive Advantage, Michael Porter introduced a generic value chain model that comprises a sequence of activities found to be common to a wide range of firms. Porter identified primary and support activities as shown in the following diagram:

Porter's Generic Value Chain Inbound > Operations > Outbound > Marketing > Service > M

Logistics

Logistics

& Sales

A R G I N

Firm Infrastructure

HR Management

Technology Development

Procurement

The goal of these activities is to offer the customer a level of value that exceeds the cost of the activities, thereby resulting in a profit margin. The primary value chain activities are:

Inbound Logistics: the receiving and warehousing of raw materials, and their distribution to manufacturing as they are required.

Operations: the processes of transforming inputs into finished products and services.

Outbound Logistics: the warehousing and distribution of finished goods. Marketing & Sales: the identification of customer needs and the generation of sales.

Service: the support of customers after the products and services are sold to them.

These primary activities are supported by:

The infrastructure of the firm: organizational structure, control systems, company culture, etc.

Human resource management: employee recruiting, hiring, training, development, and compensation.

Technology development: technologies to support value-creating activities. Procurement: purchasing inputs such as materials, supplies, and equipment.

The firm's margin or profit then depends on its effectiveness in performing these activities efficiently, so that the amount that the customer is willing to pay for the products exceeds the cost of the activities in the value chain. It is in these activities that a firm has the opportunity to generate superior value.

A competitive advantage may be achieved by reconfiguring the value chain to provide lower cost or better differentiation. The value chain model is a useful analysis tool for defining a firm's core competencies and the activities in which it can pursue a competitive advantage as follows:

Cost advantage: by better understanding costs and squeezing them out of the value-adding activities.

Differentiation: by focusing on those activities associated with core competencies and capabilities in order to perform them better than do competitors.

Cost Advantage and the Value Chain A firm may create a cost advantage either by reducing the cost of individual value chain activities or by reconfiguring the value chain. Once the value chain is defined, a cost analysis can be performed by assigning costs to the value chain activities. The costs obtained from the accounting report may need to be modified in order to allocate them properly to the value creating activities. Porter identified 10 cost drivers related to value chain activities:

Economies of scale Learning Capacity utilization Linkages among activities Interrelationships among business units Degree of vertical integration Timing of market entry Firm's policy of cost or differentiation Geographic location Institutional factors (regulation, union activity, taxes, etc.)

A firm develops a cost advantage by controlling these drivers better than do the competitors. A cost advantage also can be pursued by reconfiguring the value chain. Reconfiguration means structural changes such a new production process, new distribution channels, or a different sales approach. For example, FedEx structurally redefined express freight service by acquiring its own planes and implementing a hub and spoke system.

Differentiation and the Value Chain A differentiation advantage can arise from any part of the value chain. For example, procurement of inputs that are unique and not widely available to competitors can create differentiation, as can distribution channels that offer high service levels. Differentiation stems from uniqueness. A differentiation advantage may be achieved either by changing individual value chain activities to increase uniqueness in the final product or by reconfiguring the value chain. Porter identified several drivers of uniqueness:

Policies and decisions Linkages among activities Timing Location Interrelationships Learning Integration Scale (e.g. better service as a result of large scale) Institutional factors

Many of these also serve as cost drivers. Differentiation often results in greater costs, resulting in tradeoffs between cost and differentiation. There are several ways in which a firm can reconfigure its value chain in order to create uniqueness. It can forward integrate in order to perform functions that once were performed by its customers. It can backward integrate in order to have more control over its inputs. It may implement new process technologies or utilize new distribution channels. Ultimately, the firm may need to be creative in order to develop a novel value chain configuration that increases product differentiation. Technology and the Value Chain Because technology is employed to some degree in every value creating activity, changes in technology can impact competitive advantage by incrementally changing the activities themselves or by making possible new configurations of the value chain. Various technologies are used in both primary value activities and support activities:

Inbound Logistics Technologies

o o

Transportation Material handling

o o o o

Material storage Communications Testing Information systems

Operations Technologies
o o o o o o o o o

Process Materials Machine tools Material handling Packaging Maintenance Testing Building design & operation Information systems

Outbound Logistics Technologies

o o o o

Transportation Material handling Packaging Communications

Information systems

Marketing & Sales Technologies

o o o o

Media Audio/video Communications Information systems

Service Technologies
o o o

Testing Communications Information systems

Note that many of these technologies are used across the value chain. For example, information systems are seen in every activity. Similar technologies are used in support activities. In addition, technologies related to training, computer-aided design, and software development frequently are employed in support activities. To the extent that these technologies affect cost drivers or uniqueness, they can lead to a competitive advantage.

Linkages between Value Chain Activities Value chain activities are not isolated from one another. Rather, one value chain activity often affects the cost or performance of other ones. Linkages may exist between primary activities and also between primary and support activities. Consider the case in which the design of a product is changed in order to reduce manufacturing costs. Suppose that in advertantly the new product design results in increased service costs; the cost reduction could be less than anticipated and even worse, there could be a net cost increase. Sometimes however, the firm may be able to reduce cost in one activity and consequently enjoy a cost reduction in another, such as when a design change simultaneously reduces manufacturing costs and improves reliability so that the service costs also are reduced. Through such improvements the firm has the potential to develop a competitive advantage. Analyzing Business Unit Interrelationships Interrelationships among business units form the basis for a horizontal strategy. Such business unit interrelationships can be identified by a value chain analysis. Tangible interrelationships offer direct opportunities to create a synergy among business units. For example, if multiple business units require a particular raw

material, the procurement of that material can be shared among the business units. This sharing of the procurement activity can result in cost reduction. Such interrelationships may exist simultaneously in multiple value chain activities. Unfortunately, attempts to achieve synergy from the interrelationships among different business units often fall short of expectations due to unanticipated drawbacks. The cost of coordination, the cost of reduced flexibility, and organizational practicalities should be analyzed when devising a strategy to reap the benefits of the synergies. Outsourcing Value Chain Activities A firm may specialize in one or more value chain activities and outsource the rest. The extent to which a firm performs upstream and downstream activities is described by its degree of vertical integration. A thorough value chain analysis can illuminate the business system to facilitate outsourcing decisions. To decide which activities to outsource, managers must understand the firm's strengths and weaknesses in each activity, both in terms of cost and ability to differentiate. Managers may consider the following when selecting activities to outsource:

Whether the activity can be performed cheaper or better by suppliers.

Whether the activity is one of the firm's core competencies from which stems a cost advantage or product differentiation.

The risk of performing the activity in-house. If the activity relies on fastchanging technology or the product is sold in a rapidly-changing market, it may be advantageous to outsource the activity in order to maintain flexibility and avoid the risk of investing in specialized assets.

Whether the outsourcing of an activity can result in business process improvements such as reduced lead time, higher flexibility, reduced inventory, etc.

The Value Chain System A firm's value chain is part of a larger system that includes the value chains of upstream suppliers and downstream channels and customers. Porter calls this series of value chains the value system, shown conceptually below: The Value System Supplier ... > Value Chain > Value Chain Firm > Value Chain Channel > Value Chain Buyer

Linkages exist not only in a firm's value chain, but also between value chains. While a firm exhibiting a high degree of vertical integration is poised to better coordinate upstream and downstream activities, a firm having a lesser degree of vertical integration nonetheless can forge agreements with suppliers and channel partners to achieve better coordination. For example, an auto manufacturer may have its suppliers set up facilities in close proximity in order to minimize transport costs and reduce parts inventories. Clearly, a firm's success in developing and sustaining a competitive advantage depends not only on its own value chain, but on its ability to manage the value system of which it is a part.

Vertical Integration The degree to which a firm owns its upstream suppliers and its downstream buyers is referred to as vertical integration. Because it can have a significant impact on a business unit's position in its industry with respect to cost, differentiation, and other strategic issues, the vertical scope of the firm is an important consideration in corporate strategy. Expansion of activities downstream is referred to as forward integration, and expansion upstream is referred to as backward integration.

The concept of vertical integration can be visualized using the value chain. Consider a firm whose products are made via an assembly process. Such a firm may consider backward integrating into intermediate manufacturing or forward integrating into distribution, as illustrated below:

Example of Backward and Forward Integration

No Integration

Backward Integration

Forward Integration

Raw Materials Raw Materials Raw Materials

Intermediate Manufacturing Intermediate Intermediate

Manufacturing

Manufacturing

Assembly

Assembly Assembly

Distribution

Distribution

Distribution

End Customer End Customer End Customer

Two issues that should be considered when deciding whether to vertically integrate is cost and control. The cost aspect depends on the cost of market transactions between firms versus the cost of administering the same activities internally within

a single firm. The second issue is the impact of asset control, which can impact barriers to entry and which can assure cooperation of key value-adding players. The following benefits and drawbacks consider these issues. Benefits of Vertical Integration Vertical integration potentially offers the following advantages:

Reduce transportation costs if common ownership results in closer geographic proximity.

Improve supply chain coordination. Provide more opportunities to differentiate by means of increased control over inputs.

Capture upstream or downstream profit margins. Increase entry barriers to potential competitors, for example, if the firm can gain sole access to a scarce resource.

Gain access to downstream distribution channels that otherwise would be inaccessible.

Facilitate investment in highly specialized assets in which upstream or downstream players may be reluctant to invest.

Lead to expansion of core competencies.

Drawbacks of Vertical Integration While some of the benefits of vertical integration can be quite attractive to the firm, the drawbacks may negate any potential gains. Vertical integration potentially has the following disadvantages:

Capacity balancing issues. For example, the firm may need to build excess upstream capacity to ensure that its downstream operations have sufficient supply under all demand conditions.

Potentially higher costs due to low efficiencies resulting from lack of supplier competition.

Decreased flexibility due to previous upstream or downstream investments. (Note however, that flexibility to coordinate vertically-related activities may increase.)

Decreased ability to increase product variety if significant in-house development is required.

Developing new core competencies may compromise existing competencies. Increased bureaucratic costs.

Factors Favoring Vertical Integration The following situational factors tend to favor vertical integration:

Taxes and regulations on market transactions Obstacles to the formulation and monitoring of contracts. Strategic similarity between the vertically-related activities. Sufficiently large production quantities so that the firm can benefit from economies of scale.

Reluctance of other firms to make investments specific to the transaction.

Factors Against Vertical Integration The following situational factors tend to make vertical integration less attractive:

The quantity required from a supplier is much less than the minimum efficient scale for producing the product.

The product is a widely available commodity and its production cost decreases significantly as cumulative quantity increases.

The core competencies between the activities are very different. The vertically adjacent activities are in very different types of industries. For example, manufacturing is very different from retailing.

The addition of the new activity places the firm in competition with another player with which it needs to cooperate. The firm then may be viewed as a competitor rather than a partner

Alternatives to Vertical Integration There are alternatives to vertical integration that may provide some of the same benefits with fewer drawbacks. The following are a few of these alternatives for relationships between vertically-related organizations:

long-term explicit contracts franchise agreements joint ventures co-location of facilities implicit contracts (relying on firms' reputation) Horizontal Integration

The acquisition of additional business activities at the same level of the value chain is referred to as horizontal integration. This form of expansion contrasts with vertical integration by which the firm expands into upstream or downstream activities. Horizontal growth can be achieved by internal expansion or by external

expansion through mergers and acquisitions of firms offering similar products and services. A firm may diversify by growing horizontally into unrelated businesses. Some examples of horizontal integration include:

The Standard Oil Company's acquisition of 40 refineries. An automobile manufacturer's acquisition of a sport utility vehicle manufacturer.

A media company's ownership of radio, television, newspapers, books, and magazines.

Advantages of Horizontal Integration The following are some benefits sought by firms that horizontally integrate:

Economies of scale - acheived by selling more of the same product, for example, by geographic expansion.

Economies of scope - achieved by sharing resources common to different products. Commonly referred to as "synergies."

Increased market power (over suppliers and downstream channel members) Reduction in the cost of international trade by operating factories in foreign markets.

Sometimes benefits can be gained through customer perceptions of linkages between products. For example, in some cases synergy can be achieved by using the same brand name to promote multiple products. However, such extensions can have drawbacks, as pointed out by Al Ries and Jack Trout in their marketing classic,Positioning. Pitfalls of Horizontal Integration Horizontal integration by acquisition of a competitor will increase a firm's market share. However, if the industry concentration increases significantly then anti-trust issues may arise. Aside from legal issues, another concern is whether the anticipated economic gains will materialize. Before expanding the scope of the firm through horizontal integration, management should be sure that the imagined benefits are real. Many blunders have been made by firms that broadened their horizontal scope to achieve synergies that did not exist, for example, computer hardware manufacturers who entered the software business on the premise that there were synergies between hardware and software. However, a connection between two products does not necessarily imply realizable economies of scope.

Finally, even when the potential benefits of horizontal integration exist, they do not materialize spontaneously. There must be an explicit horizontal strategy in place. Such strategies generally do not arise from the bottom-up, but rather, must be formulated by corporate management.

Ansoff Matrix To portray alternative corporate growth strategies, Igor Ansoff presented a matrix that focused on the firm's present and potential products and markets (customers). By considering ways to grow via existing products and new products, and in existing markets and new markets, there are four possible product-market combinations. Ansoff's matrix is shown below: Ansoff Matrix

Existing Products

New Products

Existing Markets Market Penetration Product Development

New Markets Market Development Diversification

Ansoff's matrix provides four different growth strategies:

Market Penetration - the firm seeks to achieve growth with existing products in their current market segments, aiming to increase its market share.

Market Development - the firm seeks growth by targeting its existing products to new market segments.

Product Development - the firms develops new products targeted to its existing market segments.

Diversification - the firm grows by diversifying into new businesses by developing new products for new markets.

Selecting a Product-Market Growth Strategy The market penetration strategy is the least risky since it leverages many of the firm's existing resources and capabilities. In a growing market, simply maintaining

market share will result in growth, and there may exist opportunities to increase market share if competitors reach capacity limits. However, market penetration has limits, and once the market approaches saturation another strategy must be pursued if the firm is to continue to grow. Market development options include the pursuit of additional market segments or geographical regions. The development of new markets for the product may be a good strategy if the firm's core competencies are related more to the specific product than to its experience with a specific market segment. Because the firm is expanding into a new market, a market development strategy typically has more risk than a market penetration strategy. A product development strategy may be appropriate if the firm's strengths are related to its specific customers rather than to the specific product itself. In this situation, it can leverage its strengths by developing a new product targeted to its existing customers. Similar to the case of new market development, new product development carries more risk than simply attempting to increase market share. Diversification is the most risky of the four growth strategies since it requires both product and market development and may be outside the core competencies of the firm. In fact, this quadrant of the matrix has been referred to by some as the "suicide cell". However, diversification may be a reasonable choice if the high risk

is compensated by the chance of a high rate of return. Other advantages of diversification include the potential to gain a foothold in an attractive industry and the reduction of overall business portfolio risk. BCG Growth-Share Matrix Companies that are large enough to be organized into strategic business units face the challenge of allocating resources among those units. In the early 1970's the Boston Consulting Group developed a model for managing a portfolio of different business units (or major product lines). The BCG growth-share matrix displays the various business units on a graph of the market growth rate vs. market share relative to competitors:

BCG Growth-Share Matrix

Resources are allocated to business units according to where they are situated on the grid as follows:

Cash Cow - a business unit that has a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be used to invest in other business units.

Star - a business unit that has a large market share in a fast growing industry. Stars may generate cash, but because the market is growing rapidly they require investment to maintain their lead. If successful, a star will become a cash cow when its industry matures.

Question Mark (or Problem Child) - a business unit that has a small market share in a high growth market. These business units require resources

to grow market share, but whether they will succeed and become stars is unknown.

Dog - a business unit that has a small market share in a mature industry. A dog may not require substantial cash, but it ties up capital that could better be deployed elsewhere. Unless a dog has some other strategic purpose, it should be liquidated if there is little prospect for it to gain market share.

The BCG matrix provides a framework for allocating resources among different business units and allows one to compare many business units at a glance. However, the approach has received some negative criticism for the following reasons:

The link between market share and profitability is questionable since increasing market share can be very expensive.

The approach may overemphasize high growth, since it ignores the potential of declining markets.

The model considers market growth rate to be a given. In practice the firm may be able to grow the market.

These issues are addressed by the GE / McKinsey Matrix, which considers market growth rate to be only one of many factors that make an industry attractive, and

which considers relative market share to be only one of many factors describing the competitive strength of the business unit. GE / McKinsey Matrix In consulting engagements with General Electric in the 1970's, McKinsey & Company developed a nine-cell portfolio matrix as a tool for screening GE's large portfolio of strategic business units (SBU). This business screen became known as theGE/McKinsey Matrix and is shown below:

GE / McKinsey Matrix

Business Unit Strength High Medium Low

High

Medium

Low

The GE / McKinsey matrix is similar to the BCG growth-share matrix in that it maps strategic business units on a grid of the industry and the SBU's position in the industry. The GE matrix however, attempts to improve upon the BCG matrix in the following two ways:

The GE matrix generalizes the axes as "Industry Attractiveness" and "Business Unit Strength" whereas the BCG matrix uses the market growth rate as a proxy for industry attractiveness and relative market share as a proxy for the strength of the business unit.

The GE matrix has nine cells vs. four cells in the BCG matrix.

Industry attractiveness and business unit strength are calculated by first identifying criteria for each, determining the value of each parameter in the criteria, and

multiplying that value by a weighting factor. The result is a quantitative measure of industry attractiveness and the business unit's relative performance in that industry. Industry Attractiveness The vertical axis of the GE / McKinsey matrix is industry attractiveness, which is determined by factors such as the following:

Market growth rate Market size Demand variability Industry profitability Industry rivalry Global opportunities Macro environmental factors (PEST)

Each factor is assigned a weighting that is appropriate for the industry. The industry attractiveness then is calculated as follows:

Industry attractiveness

factor value1 x factor weighting1 + factor value2 x factor weighting2

. . .

+ factor valueN x factor weightingN

Business Unit Strength The horizontal axis of the GE / McKinsey matrix is the strength of the business unit. Some factors that can be used to determine business unit strength include:

Market share Growth in market share Brand equity Distribution channel access Production capacity Profit margins relative to competitors

The business unit strength index can be calculated by multiplying the estimated value of each factor by the factor's weighting, as done for industry attractiveness.

Plotting the Information Each business unit can be portrayed as a circle plotted on the matrix, with the information conveyed as follows:

Market size is represented by the size of the circle. Market share is shown by using the circle as a pie chart. The expected future position of the circle is portrayed by means of an arrow.

The following is an example of such a representation:

The shading of the above circle indicates a 38% market share for the strategic business unit. The arrow in the upward left direction indicates that the business unit is projected to gain strength relative to competitors, and that the business unit is in an industry that is projected to become more attractive. The tip of the arrow indicates the future position of the center point of the circle. Strategic Implications Resource allocation recommendations can be made to grow, hold, or harvest a strategic business unit based on its position on the matrix as follows:

Grow strong business units in attractive industries, average business units in attractive industries, and strong business units in average industries.

Hold average businesses in average industries, strong businesses in weak industries, and weak business in attractive industries.

Harvest weak business units in unattractive industries, average business units in unattractive industries, and weak business units in average industries.

There are strategy variations within these three groups. For example, within the harvest group the firm would be inclined to quickly divest itself of a weak business in an unattractive industry, whereas it might perform a phased harvest of an average business unit in the same industry. While the GE business screen represents an improvement over the more simple BCG growth-share matrix, it still presents a somewhat limited view by not considering interactions among the business units and by neglecting to address the core competencies leading to value creation. Rather than serving as the primary tool for resource allocation, portfolio matrices are better suited to displaying a quick synopsis of the strategic business units. Core Competencies

In their 1990 article entitled, The Core Competence of the Corporation, C.K. Prahalad and Gary Hamel coined the term core competencies, or the collective learning and coordination skills behind the firm's product lines. They made the case that core competencies are the source of competitive advantage and enable the firm to introduce an array of new products and services. According to Prahalad and Hamel, core competencies lead to the development of core products. Core products are not directly sold to end users; rather, they are used to build a larger number of end-user products. For example, motors are a core product that can be used in wide array of end products. The business units of the corporation each tap into the relatively few core products to develop a larger number of end user products based on the core product technology. This flow from core competencies to end products is shown in the following diagram:

Core Competencies to End Products End Products

10 11 12

Business 1

Business 2

Business 3

Business 4

Core Product 1

Core Product 2

Competence 1

Competence 2

Competence 3

Competence 4

The intersection of market opportunities with core competencies forms the basis for launching new businesses. By combining a set of core competencies in different ways and matching them to market opportunities, a corporation can launch a vast array of businesses. Without core competencies, a large corporation is just a collection of discrete businesses. Core competencies serve as the glue that bonds the business units together into a coherent portfolio. Developing Core Competencies According to Prahalad and Hamel, core competencies arise from the integration of multiple technologies and the coordination of diverse production skills. Some examples include Philip's expertise in optical media and Sony's ability to miniaturize electronics. There are three tests useful for identifying a core competence. A core competence should: 1. provide access to a wide variety of markets, and 2. contribute significantly to the end-product benefits, and 3. be difficult for competitors to imitate.

Core competencies tend to be rooted in the ability to integrate and coordinate various groups in the organization. While a company may be able to hire a team of brilliant scientists in a particular technology, in doing so it does not automatically gain a core competence in that technology. It is the effective coordination among all the groups involved in bringing a product to market that results in a core competence. It is not necessarily an expensive undertaking to develop core competencies. The missing pieces of a core competency often can be acquired at a low cost through alliances and licensing agreements. In many cases an organizational design that facilitates sharing of competencies can result in much more effective utilization of those competencies for little or no additional cost. To better understand how to develop core competencies, it is worthwhile to understand what they do not entail. According to Prahalad and Hamel, core competencies are not necessarily about:

outspending rivals on R&D sharing costs among business units integrating vertically

While the building of core competencies may be facilitated by some of these actions, by themselves they are insufficient. The Loss of Core Competencies Cost-cutting moves sometimes destroy the ability to build core competencies. For example, decentralization makes it more difficult to build core competencies because autonomous groups rely on outsourcing of critical tasks, and this outsourcing prevents the firm from developing core competencies in those tasks since it no longer consolidates the know-how that is spread throughout the company. Failure to recognize core competencies may lead to decisions that result in their loss. For example, in the 1970's many U.S. manufacturers divested themselves of their television manufacturing businesses, reasoning that the industry was mature and that high quality, low cost models were available from Far East manufacturers. In the process, they lost their core competence in video, and this loss resulted in a handicap in the newer digital television industry. Similarly, Motorola divested itself of its semiconductor DRAM business at 256Kb level, and then was unable to enter the 1Mb market on its own. By recognizing its

core competencies and understanding the time required to build them or regain them, a company can make better divestment decisions. Core Products Core competencies manifest themselves in core products that serve as a link between the competencies and end products. Core products enable value creation in the end products. Examples of firms and some of their core products include:

3M - substrates, coatings, and adhesives Black & Decker - small electric motors Canon - laser printer subsystems Matsushita - VCR subsystems, compressors NEC - semiconductors Honda - gasoline powered engines

The core products are used to launch a variety of end products. For example, Honda uses its engines in automobiles, motorcycles, lawn mowers, and portable generators. Because firms may sell their core products to other firms that use them as the basis for end user products, traditional measures of brand market share are insufficient for evaluating the success of core competencies. Prahalad and Hamel suggest

that core product share is the appropriate metric. While a company may have a low brand share, it may have high core product share and it is this share that is important from a core competency standpoint. Once a firm has successful core products, it can expand the number of uses in order to gain a cost advantage via economies of scale and economies of scope. Implications for Corporate Management Prahalad and Hamel suggest that a corporation should be organized into a portfolio of core competencies rather than a portfolio of independent business units. Business unit managers tend to focus on getting immediate end-products to market rapidly and usually do not feel responsible for developing company-wide core competencies. Consequently, without the incentive and direction from corporate management to do otherwise, strategic business units are inclined to under invest in the building of core competencies. If a business unit does manage to develop its own core competencies over time, due to its autonomy it may not share them with other business units. As a solution to this problem, Prahalad and Hamel suggest that corporate managers should have the ability to allocate not only cash but also core competencies among business

units. Business units that lose key employees for the sake of a corporate core competency should be recognized for their contribution. Global Strategic Management During the last half of the twentieth century, many barriers to international trade fell and a wave of firms began pursuing global strategies to gain a competitive advantage. However, some industries benefit more from globalization than do others, and some nations have a comparative advantage over other nations in certain industries. To create a successful global strategy, managers first must understand the nature of global industries and the dynamics of global competition. Sources of Competitive Advantage from a Global Strategy A well-designed global strategy can help a firm to gain a competitive advantage. This advantage can arise from the following sources:

Efficiency
o o o

Economies of scale from access to more customers and markets Exploit another country's resources - labor, raw materials Extend the product life cycle - older products can be sold in lesser developed countries

Operational flexibility - shift production as costs, exchange rates, etc. change over time

Strategic
o o o

First mover advantage and only provider of a product to a market Cross subsidization between countries Transfer price

Risk
o

Diversify macroeconomic risks (business cycles not perfectly correlated among countries)

Diversify operational risks (labor problems, earthquakes, wars)

Learning
o

Broaden learning opportunities due to diversity of operating environments

Reputation
o

Crossover customers between markets - reputation and brand identification

Sumantra Ghoshal of INSEAD proposed a framework comprising three categories of strategic objectives and three sources of advantage that can be used to achieve them. Assembling these into a matrix results in the following framework:

Strategic Objectives

Sources of Competitive Advantage National Differences Scale Economies Scope Economies Sharing

Efficiency in Exploit factor cost Operations differences

Scale in each investments and activity costs Balancing scale

Market or policyFlexibility induced changes operational risks Societal differences Innovation in management and and Learning organization innovation reduction and Experience - cost with strategic &

Portfolio diversification

Shared learning across activities

The Nature of Competitive Advantage in Global Industries A global industry can be defined as:

An industry in which firms must compete in all world markets of that product in order to survive.

An industry in which a firm's competitive advantage depends on economies of scale and economies of scope gained across markets.

Some industries are more suited for globalization than are others. The following drivers determine an industry's globalization potential. 1. Cost Drivers
o o o

Location of strategic resources Differences in country costs Potential for economies of scale (production, R&D, etc.) Flat experience curves in an industry inhibits globalization. One reason that the facsimile industry had more global potential than the furniture industry is that for fax machines, the production costs drop 30%-40% with each doubling of volume; the curve is much flatter for the furniture industry and many service industries. Industries for which the larger expenses are in R&D, such as the aircraft industry, exhibit

more economies of scale than those industries for which the larger expenses are rent and labor, such as the dry cleaning industry. Industries in which costs drop by at least 20% for each doubling of volume tend to be good candidates for globalization.
o

Transportation costs (value/bulk or value/weight ratio) => Diamonds and semiconductors are more global than ice.

2. Customer Drivers
o

Common customer needs favor globalization. For example, the facsimile industry's customers have more homogeneous needs than those of the furniture industry, whose needs are defined by local tastes, culture, etc.

Global customers: if a firm's customers are other global businesses, globalization may be required to reach these customers in all their markets. Furthermore, global customers often require globally standardized products.

Global channels require a globally coordinated marketing program. Strong established local distribution channels inhibits globalization.

Transferable marketing: whether marketing elements such as brand names and advertising require little local adaptation. World brands

with non-dictionary names may be developed in order to benefit from a single global advertising campaign. 3. Competitive Drivers
o

Global competitors: The existence of many global competitors indicates that an industry is ripe for globalization. Global competitors will have a cost advantage over local competitors.

When competitors begin leveraging their global positions through cross-subsidization, an industry is ripe for globalization.

4. Government Drivers
o o o

Trade policies Technical standards Regulations

The furniture industry is an example of an industry that did not lend itself to globalization before the 1960's. Because furniture has a high bulk compared to its value, and because furniture is easily damaged in shipping, transport costs traditionally were high. Government trade barriers also were unfavorable. The Swedish furniture company IKEA pioneered a move towards globalization in the furniture industry. IKEA's furniture was unassembled and therefore could be shipped more economically. IKEA also lowered costs by involving the customer in the value chain; the customer carried the furniture home and assembled it himself.

IKEA also had a frugal culture that gave it cost advantages. IKEA successfully expanded in Europe since customers in different countries were willing to purchase similar designs. However, after successfully expanding to several countries, IKEA ran into difficulties in the U.S. market for several reasons:

Different tastes in furniture and a requirement for more customized furniture.

Difficult to transfer IKEA's frugal culture to the U.S. The Swedish Krona increased in value, increasing the cost of furniture made in Sweden and sold in the U.S.

Stock-outs due to the one to two month shipping time from Europe More competition in the U.S. than in Europe

Country Comparative Advantages Competitive advantage is a firm's ability to transform inputs into goods and services at a maximum profit on a sustained basis, better than competitors. Comparative advantage resides in the factor endowments and created endowments of particular regions. Factor endowments include land, natural resources, labor, and the size of the local population.

In the 1920's, Swedish economists Eli Hecksher and Bertil Ohlin developed the factor-proportions theory, according to which a country enjoys a comparative advantage in those goods that make intensive use of factors that the country has in relative abundance. Michael E. Porter argued that a nation can create its own endowments to gain a comparative advantage. Created endowments include skilled labor, the technology and knowledge base, government support, and culture. Porter's Diamond of National Advantage is a framework that illustrates the determinants of national advantage. This diamond represents the national playing field that countries establish for their industries. Types of International Strategy: Multi-domestic vs. Global Multi-domestic Strategy

Product customized for each market Decentralized control - local decision making Effective when large differences exist between countries Advantages: product differentiation, local responsiveness, minimized political risk, minimized exchange rate risk

Global Strategy

Product is the same in all countries. Centralized control - little decision-making authority on the local level Effective when differences between countries are small Advantages: cost, coordinated activities, faster product development

A fully multi-local value chain will have every function from R&D to distribution and service performed entirely at the local level in each country. At the other extreme, a fully global value chain will source each activity in a different country. Philips is a good example of a company that followed a multi domestic strategy. This strategy resulted in:

Innovation from local R&D Entrepreneurial spirit Products tailored to individual countries High quality due to backward integration

The multi-domestic strategy also presented Philips with many challenges:

High costs due to tailored products and duplication across countries The innovation from the local R&D groups resulted in products that were R&D driven instead of market driven.

Decentralized control meant that national buy-in was required before introducing a product - time to market was slow.

Matsushita is a good example of a company that followed a global strategy. This strategy resulted in:

Strong global distribution network Company-wide mission statement that was followed closely Financial control More applied R&D Ability to get to market quickly and force standards since individual country buy-in was not necessary.

The global strategy presented Matsushita with the following challenges:

Problem of strong yen Too much dependency on one product - the VCR Loss of non-Asian employees because of glass ceilings

A third strategy, which was appropriate to Whirlpool is one of mass customization, discussed below.

Global Cost Structure Analysis In 1986, Whirlpool Corporation was considering expanding into Europe by acquiring Philips' Major Domestic Appliance Division. From the framework of customers, costs, competitors, and government, there were several pros and cons to this proposed strategy. Pros

Internal components of the appliances could be the same, offering economies of scale.

The cost to customize the outer structure of the appliances was relatively low.

The appliance industry was mature with low growth. The acquisition would offer an avenue to continue growing.

Cons

Fragmented distribution network in Europe. Different consumer needs and preferences. For example, in Europe refrigerators tend to be smaller than in the U.S., have only one outside door, and have standard sizes so they can be built into the kitchen cabinet. In

Japan, refrigerators tend to have several doors in order to keep different compartments at different temperatures and to isolate odors. Also, because houses are smaller in Japan, consumers desire quieter appliances.

Whirlpool already was the dominant player in a fragmented industry.

Since Philip's had a relatively small market share in the European appliance market, one must analyze the cost structure to determine if the acquisition would offer Whirlpool a competitive advantage. With the acquisition, Whirlpool would be able to cut costs on raw materials, depreciation and maintenance, R&D, and general and administrative costs. These costs represented 53% of Whirlpool's cost structure. Compared to most other industries, this percentage of costs that could benefit from economies of scale is quite large. It would be reasonable to expect a 10% reduction in these costs, an amount that would decrease overall cost by 5.3%, doubling profits. Such potential justifies the risk of increasing the complexity of the organization. Because of the different preferences of consumers in different markets, a purely global strategy with standard products was not appropriate. Whirlpool would have to adapt its products to local markets, but maintain some global integration in order to realize cost benefits. This strategy is known as "mass customization."

Whirlpool acquired Philips' Major Domestic Appliance Division, 47% in 1989 and the remainder in 1991. Initially, margins doubled as predicted. However, local competitors responded by better tailoring their products and cutting costs; Whirlpool's profits then began to decline. Whirlpool applied the same strategy to Asia, but GE was outperforming Whirlpool there by tailoring its products as part of its multi-domestic strategy. Globalizing Service Businesses Service industries tend to have a flat experience curve and lower economies of scale. However, some economy of scale may be gained through knowledge sharing, which enables the cost of developing the knowledge over a larger base. Also, in some industries such as professional services, capacity utilization can better be managed as the scope of operations increases. On the customer side, because a service firm's customers may themselves be operating internationally, global expansion may be a necessity. Knowledge gained in foreign markets can used to better service customers. Finally, being global also enhances a firm's reputation, which is critical in service businesses. High quality service products often depend on the service firm's culture, and maintaining a consistent culture when expanding globally is a challenge.

A good example of a service firm that experienced global expansion challenges is the management consulting firm Bain & Company, Inc. In consulting, a firm's most important strategic asset is its reputation, so a consistent firm culture is very important. Bain faced the following challenges, which depend on the firm's strategy and which affect the ability to maintain a consistent culture:

Coordinating across offices and sharing knowledge Whether to hire locals or international staff How to compensate

Modes of Foreign Market Entry An important part of a global strategy is the method that the firm will use to enter the foreign market. There are four possible modes of foreign market entry:

Exporting Licensing (includes franchising) Joint Venture Foreign Direct Investment

These options vary in their degree of speed, control, and risk, as well as the required level of investment and market knowledge. The entry mode selection can have a significant impact on the firm's foreign market success.

Issues in Emerging Economies In emerging economies, capital markets are relatively inefficient. There is a lack of information, the cost of capital is high, and venture capital is virtually nonexistent. Because of the scarcity of high-quality educational institutions, the labor markets lack well trained people and companies often must fill the void. Because of lacking communications infrastructure, building a brand name is difficult but good brands are highly valued because of lower product quality of the alternatives. Relationships with government officials often are necessary to succeed, and contracts may not be well enforced by the legal system. When a large government monopoly (e.g. a state-owned oil company) is privatized, there often is political pressure in the country against allowing the firm to be acquired by a foreign entity. Whereas a very large U.S. oil company may prefer acquisitions, because of the anti-foreign sentiment joint ventures often are more appropriate for outside companies interested in newly privatized emerging economy firms.

Knowledge Management in Global Firms There is much value in transferring knowledge and best practices between parts of a global firm. However, many barriers prevent knowledge from being transferred:

Barriers attributable to the knowledge source

o o

lack of motivation lack of credibility

Barriers attributable to the knowledge itself - ambiguity and complexity Barriers attributable to the knowledge recipient
o o

lack of motivation (not invented here syndrome) lack of absorptive capacity - need prerequisite knowledge to advance to next level

Barriers attributable to the recipient's existing process - process rigidity Barriers attributable to the recipient's external environment and constraints

Furthermore, even when the transfer is successful, there often is a temporary drop in performance before the improvements are seen. During this period, there is danger of losing faith in the new way of doing things. To facilitate knowledge transfer a firm can:

Implement processes to systematically identify valuable knowledge and best practices.

Create incentives to motivate both the knowledge source and recipient. Develop absorptive capacity in the recipient - cumulative knowledge Develop strong technical and social networks between parts of the firm that can share knowledge.

Country Management Country managers must have the following knowledge:

Knowledge of strategic management Firm-specific knowledge Country-specific knowledge Knowledge of the global environment

Country organizations can assume the role of implementor, contributor, strategic leader, or black hole, depending on the combination of importance of the local market and local resources. The least favorable of these roles is the black hole, which is a subsidiary in a strategically important market that has few capabilities. A firm can find itself in this situation because of company traditions, ignorance of local conditions,

unfavorable entry conditions, misreading the market, excessive reliance on expatriates, and poor external relations. To get out of a black hole a firm can form alliances, focus its investments, implement a local R&D organization, or when all else fails, exit the country.

Strategic Importance of Local Market

Level of Local Resources & Capabilities Low Implementor Black Hole High Contributor Strategic Leader

Low High

Country managers assume different roles (The New Country Managers, John A. Quelch, Professor of Business Administration, Harvard Business School).

International Structure: Country manager is a trader who implements policy. Multinational Structure: Country manager plays the role of a functional manager with profit and loss responsibilities.

Transnational Structure: Country manager acts as a cabinet member (team player) since management control systems are standardized and decision-

making power is shifted to the region manager. The country manager develops the lead market in his country and transfers the knowledge gained to other similar markets.

Global Structure: Country manager acts as an ambassador and administrator. In a global firm there usually are business directors who oversee marketing and sales. The role of the country manager becomes one of a statesman. This person usually is a local with good government contacts. Porter's Diamond of National Advantage

Classical theories of international trade propose that comparative advantage resides in the factor endowments that a country may be fortunate enough to inherit. Factor endowments include land, natural resources, labor, and the size of the local population. Michael E. Porter argued that a nation can create new advanced factor endowments such as skilled labor, a strong technology and knowledge base, government support, and culture. Porter used a diamond shaped diagram as the basis of a framework to illustrate the determinants of national advantage. This diamond represents the national playing field that countries establish for their industries.

Porter's Diamond of National Advantage Firm Strategy, Structure, and Rivalry

Factor Conditions

Demand Conditions

Related and Supporting Industries

The individual points on the diamond and the diamond as a whole affect four ingredients that lead to a national comparative advantage. These ingredients are: 1. the availability of resources and skills, 2. information that firms use to decide which opportunities to pursue with those resources and skills,

3. the goals of individuals in companies, 4. the pressure on companies to innovate and invest. The points of the diamond are described as follows.

I. Factor Conditions

A country creates its own important factors such as skilled resources and technological base.

The stock of factors at a given time is less important than the extent that they are upgraded and deployed.

Local disadvantages in factors of production force innovation. Adverse conditions such as labor shortages or scarce raw materials force firms to develop new methods, and this innovation often leads to a national comparative advantage.

II. Demand Conditions

When the market for a particular product is larger locally than in foreign markets, the local firms devote more attention to that product than do foreign firms, leading to a competitive advantage when the local firms begin exporting the product.

A more demanding local market leads to national advantage. A strong, trend-setting local market helps local firms anticipate global trends.

III. Related and Supporting Industries

When local supporting industries are competitive, firms enjoy more cost effective and innovative inputs.

This effect is strengthened when the suppliers themselves are strong global competitors.

IV. Firm Strategy, Structure, and Rivalry

Local conditions affect firm strategy. For example, German companies tend to be hierarchical. Italian companies tend to be smaller and are run more like extended families. Such strategy and structure helps to determine in which types of industries a nation's firms will excel.

In Porter's Five Forces model, low rivalry made an industry attractive. While at a single point in time a firm prefers less rivalry, over the long run more local rivalry is better since it puts pressure on firms to innovate and improve. In fact, high local rivalry results in less global rivalry.

Local rivalry forces firms to move beyond basic advantages that the home country may enjoy, such as low factor costs.

The Diamond as a System

The effect of one point depends on the others. For example, factor disadvantages will not lead firms to innovate unless there is sufficient rivalry.

The diamond also is a self-reinforcing system. For example, a high level of rivalry often leads to the formation of unique specialized factors.

Government's Role The role of government in the model is to:

Encourage companies to raise their performance, for example by enforcing strict product standards.

Stimulate early demand for advanced products. Focus on specialized factor creation.

Stimulate local rivalry by limiting direct cooperation and enforcing antitrust regulations.

Application to the Japanese Fax Machine Industry The Japanese facsimile industry illustrates the diamond of national advantage. Japanese firms achieved dominance is this industry for the following reasons:

Japanese factor conditions: Japan has a relatively high number of electrical engineers per capita.

Japanese demand conditions: The Japanese market was very demanding because of the written language.

Large number of related and supporting industries with good technology, for example, good miniaturized components since there is less space in Japan.

Domestic rivalry in the Japanese fax machine industry pushed innovation and resulted in rapid cost reductions.

Government support - NTT (the state-owned telecom company) changed its cumbersome approval requirements for each installation to a more general type approval.

Foreign Market Entry Modes

The decision of how to enter a foreign market can have a significant impact on the results. Expansion into foreign markets can be achieved via the following four mechanisms:

Exporting Licensing Joint Venture

Direct Investment

Exporting Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since exporting does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses. Exporting commonly requires coordination among four players:

Exporter Importer Transport provider Government

Licensing Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance. Because little investment on the part of the licensor is required, licensing has the potential to provide a very large ROI. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost. Joint Venture There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships. Such alliances often are favorable when:

the partners' strategic goals converge while their competitive goals diverge; the partners' size, market power, and resources are small compared to the industry leaders; and

partners' are able to learn from one another while limiting access to their own proprietary skills.

The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions. Potential problems include:

conflict over asymmetric new investments mistrust over proprietary knowledge performance ambiguity - how to split the pie lack of parent firm support cultural clashes if, how, and when to terminate the relationship

Joint ventures have conflicting pressures to cooperate and compete:

Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position.

The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources.

The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control.

Foreign Direct Investment Foreign direct investment (FDI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through the acquisition of an existing entity or the establishment of a new enterprise. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment. The Case of Euro Disney Different modes of entry may be more appropriate under different circumstances, and the mode of entry is an important factor in the success of the project. Walt Disney Co. faced the challenge of building a theme park in Europe. Disney's mode of entry in Japan had been licensing. However, the firm chose direct investment in its European theme park, owning 49% with the remaining 51% held publicly. Besides the mode of entry, another important element in Disney's decision was exactly where in Europe to locate. There are many factors in the site selection

decision, and a company carefully must define and evaluate the criteria for choosing a location. The problems with the EuroDisney project illustrate that even if a company has been successful in the past, as Disney had been with its California, Florida, and Tokyo theme parks, future success is not guaranteed, especially when moving into a different country and culture. The appropriate adjustments for national differences always should be made.

Comparision of Market Entry Options: Conditions Favoring this Mode Mode Limited sales potential in target country; little product adaptation required Minimizes risk and investment. Trade barriers & tariffs add to costs. Transport costs Limits access to local information Company viewed as an outsider Advantages Disadvantages

Exporting Distribution channels close to Speed of entry plants Maximizes scale; uses High target country production costs existing facilities.

Liberal import policies High political risk

Import and investment barriers Minimizes risk and Legal protection possible in target environment. Speed of entry Licensing Low sales potential in target country. Large cultural distance High ROI Licensee lacks ability to become a competitor. limited Able to circumvent Knowledge spillovers trade barriers License period is competitor. use of assets. investment. Licensee may become Lack of control over

Import barriers Overcomes ownership Large cultural distance restrictions and Assets cannot be fairly priced cultural distance High sales potential Joint Some political risk Ventures Government restrictions on foreign ownership Local company can provide skills, resources, distribution network, brand name, etc. Import barriers Greater knowledge of modes Small cultural distance Direct Investment Assets cannot be fairly priced Can better apply resources and specialized skills High sales potential Minimizes knowledge Low political risk May be difficult to commitment local market Requires more Higher risk than other Potential for learning Knowledge spillovers Viewed as insider Partner may become a Less investment competitor. required Dilution of control Difficult to manage

Combines resources of Greater risk than 2 companies. exporting a & licensing

spillover Can be viewed as an insider

manage the local resources.

Unit-1 STRATEGIC MANAGEMENT Sub Code: 08MBA31 IA Marks: 50 No. of Lecture Hrs/week: 04 Exam Hours: 3 Hours Total No. of Lecture/Hrs: 56 Exam Marks: 100 MODULE 1 (7 Hours) Meaning and Nature of Strategic Management, Its importance and relevance, Characteristics of Strategic Management, The Strategic Management Process Relationship between a Companys Strategy and its Business Model. MODULE 2 (7 Hours) Strategy formulation Developing Strategic vision and Mission for a company Setting Objectives Strategic Objectives and Financial Objectives Balanced score card, Company Goals and Company Philosophy. The hierarchy of Strategic Intent Merging the Strategic Vision Objectives and Strategy into a Strategic Plan.

MODULE 3 (7 Hours) Analysing a companys External Environment The Strategically relevant components of a companys external environment Industry AnalysisPorters dominant economic features Competitive Environment Analysis Porters five force model - Industry driving forces key success factorsconcept and implementation. MODULE 4 (6 Hours) Analysing a companys resources and competitive position Analysis of the companys present strategies SWOT Analysis Value chain Analysis Bench marking. MODULE 5 (7 Hours) Generic Competitive Strategies Low cost, Differentiation, Best cost , Focused Strategies .Strategic alliances, Collaborative partnerships , Mergers and acquisition, Joint Ventures Strategies Outsourcing StrategiesInternational Business level strategies. MODULE 6 (7 Hours) Formulating long term and Grand Strategies Tailoring Strategy to fit specific Industry and company situation long term objectives for Grand Strategies- Innovation, Integration and diversification Conglomerate Diversification, Retrenchment, Restructuring and turnaround GE nine cell

planning grid and BCG Matrix. MODULE 7 (8 Hours) Strategy Implementation Operationalizing strategy, Annual Objectives, Developing Functional strategies, Developing and communicating concise policies. Institutionalizing the strategy, Structure, Leadership and Culture. Ethical Process and corporate social responsibility. MODULE 8 Strategic review and audit (7 Hours) Strategic control guiding and evaluating strategies, Establishing Strategic controls, Operational Control Systems, Monitoring performance and evaluating deviations, challenges of strategy Implementation.

RECOMMENDED BOOKS: 1. Crafting and executing strategy by Arthur A. Thomnson Jr., A. J. Strickland III, 1. John E. Gamble-Tata McGraw Hill, 14/e, 2005 2. Strategic Management An Integrated Approach by Charles W.L. Hill, Gareth R..Jones BIZTANTRA, 6/e, 2004/05 3. U. Iachru, Strategic Management, Excel Books.

REFERENCE BOOKS: 1. Strategic Management Concepts & Cases by Fred R. David Pearson Education/PHI. 2. Strategic Management Building and Sustaining Competitive Advantage by Robert A. Pitts, David Lei. Thomson South Western, 3/e, 2002 3. Competitive Advantage by Michael E Porter, Free press, NY 4. Strategic Management by David Hunger For more details, visit http://www.vtu.ac.in/

unit-1 Definition: The term strategic management is used to refer to the entire scope of strategic-decision making activity in an organization. Strategic management as a concept has evolved over time and will continue to evolve. As result there are a variety of meanings and interpretations depending on the author and sources. For example, some scholars and practitioners the term strategic planning connote the total strategic management activities. Moreover, sometimes managers use the terms strategic management, strategic planning, and long-range planning

interchangeable. Finally, some of the phrases are used interchangeably with strategic management are strategy and policy formulation, andbusiness policy. To purpose of this thesis I use the terminology strategy management, as opposed to the more narrow term business policy. The following statements serve as a number of workable definitions of strategic management: Strategic management is the process of managing the pursuit of organizational mission while managing the relationship of the organization to its environment (James M. Higgins). Strategic management is defined as the set of decisions and actions resulting in the formulation and implementation of strategies designed to achieve the objectives of the organization (John A. Pearce II and Richard B. Robinson, Jr.). Strategic management is the process of examining both present and future environments, formulating the organization's objectives, and making, implementing, and controlling decisions focused on achieving these objectives in the present and future environments(Garry D. Smith, Danny R. Arnold, Bobby G. Bizzell). Strategic management is a continuous process that involves attempts to match or fit the organization with its changing environment in the most

advantageous way possible (Lester A. Digman). http://www.introduction-tomanagement.24xls.com/en202 Scope of strategic management: j. Constable has defined the area addressed by strategic management as "the management processes and decisions which determine the long-term structure and activities of the organization". This definition incorporates five key themes: * Management process. Management process as relate to how strategies are created and changed. * Management decisions. The decisions must relate clearly to a solution of perceived problems (how to avoid a threat; how to capitalize on an opportunity). * Time scales. The strategic time horizon is long. However, it for company in real trouble can be very short. * Structure of the organization. An organization is managed by people within a structure. The decisions which result from the way that managers work together within the structure can result in strategic change. * Activities of the organization. This is a potentially limitless area of study and we normally shall centre upon all activities which affect the organization.

These all five themes are fundamental to a study of the strategic management field and are discussed further in this chapter and other part of this thesis.

Components of a Strategy Statement

The strategy statement of a firm sets the firms long-term strategic direction and broad policy directions. It gives the firm a clear sense of direction and a blueprint for the firms activities for the upcoming years. The main constituents of a strategic statement are as follows: 1. Strategic Intent An organizations strategic intent is the purpose that it exists and why it will continue to exist, providing it maintains a competitive advantage. Strategic intent gives a picture about what an organization must get into immediately in order to achieve the companys vision. It motivates the people. It clarifies the vision of the vision of the company. Strategic intent helps management to emphasize and concentrate on the priorities. Strategic intent is, nothing but, the influencing of an organizations resource potential and core competencies to achieve what at first may seem to be unachievable goals in the competitive environment. A well expressed strategic intent should

guide/steer the development of strategic intent or the setting of goals and objectives that require that all of organizations competencies be controlled to maximum value. Strategic intent includes directing organizations attention on the need of winning; inspiring people by telling them that the targets are valuable; encouraging individual and team participation as well as contribution; and utilizing intent to direct allocation of resources. Strategic intent differs from strategic fit in a way that while strategic fit deals with harmonizing available resources and potentials to the external environment, strategic intent emphasizes on building new resources and potentials so as to create and exploit future opportunities. 2. Mission Statement Mission statement is the statement of the role by which an organization intends to serve its stakeholders. It describes why an organization is operating and thus provides a framework within which strategies are formulated. It describes what the organization does (i.e., present capabilities), who all it serves (i.e., stakeholders) and what makes an organization unique (i.e., reason for existence). A mission statement differentiates an organization from others by explaining its broad scope of activities, its products, and technologies it uses to achieve its goals and

objectives. It talks about an organizations present (i.e., about where we are).For instance, Microsofts mission is to help people and businesses throughout the world to realize their full potential. Wal-Marts mission is To give ordinary folk the chance to buy the same thing as rich people. Mission statements always exist at top level of an organization, but may also be made for various organizational levels. Chief executive plays a significant role in formulation of mission statement. Once the mission statement is formulated, it serves the organization in long run, but it may become ambiguous with organizational growth and innovations. In todays dynamic and competitive environment, mission may need to be redefined. However, care must be taken that the redefined mission statement should have original fundamentals/components. Mission statement has three main components-a statement of mission or vision of the company, a statement of the core values that shape the acts and behaviour of the employees, and a statement of the goals and objectives. Features of a Mission a. Mission must be feasible and attainable. It should be possible to achieve it. b. Mission should be clear enough so that any action can be taken.

c. It should be inspiring for the management, staff and society at large. d. It should be precise enough, i.e., it should be neither too broad nor too narrow. e. It should be unique and distinctive to leave an impact in everyones mind. f. It should be analytical,i.e., it should analyze the key components of the strategy. g. It should be credible, i.e., all stakeholders should be able to believe it. 2. Vision A vision statement identifies where the organization wants or intends to be in future or where it should be to best meet the needs of the stakeholders. It describes dreams and aspirations for future. For instance, Microsofts vision is to empower people through great software, any time, any place, or any device. Wal-Marts vision is to become worldwide leader in retailing. A vision is the potential to view things ahead of themselves. It answers the question where we want to be. It gives us a reminder about what we attempt to develop. A vision statement is for the organization and its members, unlike the mission statement which is for the customers/clients. It contributes in effective decision making as well as effective business planning. It incorporates a shared understanding about the nature and aim of

the organization and utilizes this understanding to direct and guide the organization towards a better purpose. It describes that on achieving the mission, how the organizational future would appear to be. An effective vision statement must have following featuresa. It must be unambiguous. b. It must be clear. c. It must harmonize with organizations culture and values. d. The dreams and aspirations must be rational/realistic. e. Vision statements should be shorter so that they are easier to memorize.

In order to realize the vision, it must be deeply instilled in the organization, being owned and shared by everyone involved in the organization. 3. Goals and objectives A goal is a desired future state or objective that an organization tries to achieve. Goals specify in particular what must be done if an organization is to attain mission or vision. Goals make mission more prominent and

concrete. They co-ordinate and integrate various functional and departmental areas in an organization. Well made goals have following featuresa. These are precise and measurable. b. These look after critical and significant issues. c. These are realistic and challenging. d. These must be achieved within a specific time frame. e. These include both financial as well as non-financial components. Objectives are defined as goals that organization wants to achieve over a period of time. These are the foundation of planning. Policies are developed in an organization so as to achieve these objectives. Formulation of objectives is the task of top level management. Effective objectives have following featuresf. These are not single for an organization, but multiple. g. Objectives should be both short-term as well as long-term. h. Objectives must respond and react to changes in environment, i.e., they must be flexible. i. These must be feasible, realistic and operational. Dimensions of Strategic Management

Strategic management process involves the entire range of decisions. Typically, strategic issues have six identifiable dimensions: * Strategic issues require top-management decisions * Strategic issues involve the allocation of large amounts of company resources * Strategic issues are likely to have significant impact on the long-term prosperity of the firm * Strategic issues are future oriented * Strategic issues usually have major multifunctional or multibusiness consequences * Strategic issues necessitate considering factors in the firm's external environment. Importance of strategic management:

Strategic management used to play a different role in more predictable times after the Second World War. Strategic plans of the past usually range 3 to 5 years. Some companies could even have plans for 10 good years. That's not possible today given rapid evolution of our society.

What still matters in strategic management lies in the value of planning ahead. There's an old saying that if you fail to plan, you are planning to fail. By acting on this, strategic management actually gives the organization direction, a sense of identity and unity towards what the business goal. Therein lies the continued importance of strategic management towards business success.

Every business has a vision and a mission. Strategic management takes into consideration both of these. Strategic management helps in achieving the organizational goals in an effective and efficient manner.

Improved strategic management processes may also facilitate the development of the more complex management structural that are needed as firms grow. It also helps firms to articulate, communicate and monitor the implementation of strategy using a system interlinked with the long term vision of the corporations.

Why Strategic Management is So Important? Today management is needed in all types of organizations regardless of their size, at all organizations levels and in all work areas. Because management is universally needed, improving the way an organization is managed is one of the

keys to success, and the importance of strategic management to achieve this goal is recognised around the world. Importance:

Like mentioned before, strategic management can and will influence the organizations performance. Thats why you can have organizations that face the same environmental conditions, but with different performance levels and considering recent studies, there is a wide belief that organizations that use strategic planning usually have better performance that the ones that dont. Another reason that supports the importance of strategic management has to do with the continually changing situation that organizations face these days, because it helps managers to examine relevant factors before deciding their course of action, thus helping them to better cope with uncertain environments. Finally, strategic management is important most organizations are composed by diverse divisions and departments that need to be coordinated, else there would be no focus on achieving the organization's goals. Strategic Management Process

Much can be said about this process, but here i'll only present the general steps to give you an idea of what is this all about. The strategic management consists of six steps: 1. Mission, goals and strategies: If you Google one of the well know companies, and search their website, you'll always find a section dedicated to their mission. That's because every organization needs a mission.Why? Because it defines the organization's purpose, their reason for being in business. It is also important to identify goals, because they are the foundation of planning and give managers a way to measure the performance their success. Finally, a manager needs to know the organizations strategies, to evaluate them and make the necessary changes. 2. External Analysis: Pretty straightforward. A manager needs to know what the competition is doing, to know how the current legislation affects the organization's activities...and so on. An external analysis is needed to examine the changes occurring in the environment, in order to adapt to those changes. 3. Internal Analysis: Now we move to inside of the organization, instead of the outside. basically in this step a manager has to analyse the organization's resources, capabilities, and spot the strengths and weaknesses in order to improve his decisions (this is also know as SWOT analysis).

4. Formulate Strategies: Considering the realities described above, managers formulate corporate, business and functional strategies. 5. Implement Strategies: Sounds logical doesn't it? After strategies are formulated they must be implemented, and like in other aspects of life, a strategy is only as good as its implementation. 6. Evaluate the Results: And now the final step where we evaluate the results. A manager should ask himself if the implemented strategies helped the organization to reach their goals. Strategic Management Process - Meaning, Steps and Components

The strategic management process means defining the organizations strategy. It is also defined as the process by which managers make a choice of a set of strategies for the organization that will enable it to achieve better performance. Strategic management is a continuous process that appraises the business and industries in which the organization is involved; appraises its competitors; and fixes goals to meet all the present and future competitors and then reassesses each strategy. Strategic management process has following four steps:

1. Environmental Scanning- Environmental scanning refers to a process of collecting, scrutinizing and providing information for strategic purposes. It helps in

analyzing the internal and external factors influencing an organization. After executing the environmental analysis process, management should evaluate it on a continuous basis and strive to improve it.

2. Strategy Formulation- Strategy formulation is the process of deciding best course of action for accomplishing organizational objectives and hence achieving organizational purpose. After conducting environment scanning, managers formulate corporate, business and functional strategies.

3.Strategy Implementation- Strategy implementation implies making the strategy work as intended or putting the organizations chosen strategy into action. Strategy implementation includes designing the organizations structure, distributing resources, developing decision making process, and managing human resources.

4. Strategy Evaluation- Strategy evaluation is the final step of strategy management process. The key strategy evaluation activities are: appraising internal and external factors that are the root of present strategies, measuring performance, and taking remedial / corrective actions. Evaluation makes sure that the organizational strategy as well as its implementation meets the organizational

objectives.

These components are steps that are carried, in chronological order, when creating a new strategic management plan. Present businesses that have already created a strategic management plan will revert to these steps as per the situations requirement, so as to make essential changes.

Components of Strategic Management Process Strategic management is an ongoing process. Therefore, it must be realized that each component interacts with the other components and that this interaction often happens in chorus. company's strategy and its business model:

People will always stress that having a well researched business plan is key before you start your business. Although creating a business plan is often an important step in the evolution of a business, particularly if you need financing or you are not experienced at running a business, it is not necessarily the essential first step. There are two key elements that should be completed prior to the business plan:

The business model The strategy

What is a Business Model? While the word model often stirs up images of mathematical formulas, a business model is in fact a story of how a business works. In general terms, a business model is the method of doing business by which a company can generate revenue. Both start-up ventures and established companies take new products and services to the market through a venture shaped by a specific business model. In their paper, The Role of the Business Model in Capturing Value from Innovation, Henry Chesbrough and Richard S. Rosenbloom outlined the six basic elements of a business model: 1. Articulate the value proposition the value created to users by using the product

2. Identify the market segment to whom and for what purpose is the product useful; specify how revenue is generated by the firm. 3. Define the value chain the sequence of activities and information required to allow a company to design, produce, market, deliver and support its product or service. 4. Estimate the cost structure and profit potential using the value chain and value proposition identified. 5. Describe the position of the firm with the value network link suppliers, customers, complementors and competitors. 6. Formulate the competitive strategy how will you gain and hold your competitive advantage over competitors or potential new entrants. Joan Magretta in her article Why Business Models Matter took the concept of the business model a little further. Magretta suggests every business model needs to pass two critical tests, the narrative test and the numbers test. The narrative test must tell a good story and explain how the business works, who is the customer, what do they value and how a company can deliver value to the customer. The numbers test means your profit and loss assumptions must add up. At the most basic level, if your model doesnt work, then your model has failed one of the two tests.

To begin the modeling process you need to articulate a value proposition on the product or service being provided. The model must then describe the target market. The customer will then value the product on its ability to reduce costs, solve a problem or create new solutions. A market focus is needed to identify what product attributes need to be targeted and how to resolve product trade-offs such as quality versus cost. You also need to identify how much to charge and how the customer will pay. Think of business modeling as the managerial equivalent of the scientific method you start with a hypothesis, which you then test in action and revise when necessary. The business model also plays a part of a planning tool by focusing managements on how all the elements and activities of the business work together as a whole. At the end of the day, the business model should be condensed onto one page consisting of: a diagram outlining how the business generates revenue, how cash flows through the business and how the product flows through the business and; a narrative describing the product/ service components, financial projections or other important elements not captured in the diagram. Business Models and Strategy

It is important to note that completing a business model does not constitute strategic planning. Strategic planning factors in the one thing a business model doesnt; competition. What is strategy? According to the Collins English Dictionary, strategy is a particular long-term plan for success". For our purposes, we will consider the essence of strategy as a formula for coping with the competition. Competitive strategy is about being different and the goal for a corporate strategy is to find a position in the industry where the company is unique and can defend itself against market forces. To do this the company must choose a set of activities that can deliver a unique mix of value. Market Forces and Strategy The determination of a strategy is rooted in determining how a company stacks up against basic market forces, how it can defend itself against these forces and how it can influence these forces. Fortunately, Michael E. Porter in his article How Competitive Forces Shape Strategy defined these market forces for us. Known as Porters 5 forces they consist of:

1. The industry this is the jockeying for position among current competitors, this can consists of price competition, new product introduction or advertising slugfests. 2. The threat of new entrants - the seriousness of the threat of entry depends on the barriers to entry and reaction from existing companies. There are 6 major barriers to entry: 1) economies of scale 2) product differentiation 3) capital requirements 4) cost disadvantages independent of size 5) access to distribution channels 6) government policy. A new company will generally have second thoughts about entering an industry if the incumbent has substantial resources to fight back, the incumbent seems likely to cut prices or industry growth is slow. 3. The threat of substitute products/services - substitutes can place a ceiling on prices that are charged and limit the potential of an industry. 4. The bargaining power of suppliers - suppliers can squeeze profitability by increasing prices or lowering the quality of the goods. 5. The bargaining power of buyers (customers) - customers can force down prices, demand better quality, more service or play competitors off on each other. Once you assess how the market forces are affecting competition in your industry and their underlying causes, you can identify the underlying strength and

weaknesses of your company, determine where it stands against each force and then determine a plan of action. Plans of action may include:

Positioning the company match your strengths and weaknesses to the companys industry, build defenses against competitive forces or find a position in the industry where forces are the weakest. You need to know your companys capabilities and the causes of the competitive forces

Influencing the balance take the offensive, for example innovative marketing can raise brand identification or differentiate the product.

Exploiting industry change an evolution of an industry can bring changes in competition. For example, in an industry life-cycle growth rates change and/or product differentiation declines; anticipate shifts in the factors underlying these forces and respond to them.

The framework for analyzing the industry and developing a strategy provides the road map for answering the question what is the potential of this business?" Reconciling the Business Model and Strategy I will use a short example to illustrate the difference between a business model and strategy. Although you may think that Wal-Mart pioneered a new business model on its road to success, the reality is that the model was really no different than the

one Kmart was using at the time. But it was what Sam Walton chose to do differently than Kmart, such as focusing on small towns as opposed to large cities and everyday low prices, that was the real reason for his success. Although Sam Waltons model was the same as Kmart's, his unique strategy made him a success. Strategy Formulation Rex C. Mitchell, Ph.D. INTRODUCTION It is useful to consider strategy formulation as part of a strategic management process that comprises three phases: diagnosis, formulation, and implementation. Strategic management is an ongoing process to develop and revise future-oriented strategies that allow an organization to achieve its objectives, considering its capabilities, constraints, and the environment in which it operates. Diagnosis includes: (a) performing a situation analysis (analysis of the internal environment of the organization), including identification and evaluation of current mission, strategic objectives, strategies, and results, plus major strengths and weaknesses; (b) analyzing the organization's external environment, including major opportunities and threats; and (c) identifying the major critical issues, which are a small set, typically two to five, of major problems, threats, weaknesses,

and/or opportunities that require particularly high priority attention by management. Formulation, the second phase in the strategic management process, produces a clear set of recommendations, with supporting justification, that revise as necessary the mission and objectives of the organization, and supply the strategies for accomplishing them. In formulation, we are trying to modify the current objectives and strategies in ways to make the organization more successful. This includes trying to create "sustainable" competitive advantages -- although most competitive advantages are eroded steadily by the efforts of competitors. A good recommendation should be: effective in solving the stated problem(s), practical (can be implemented in this situation, with the resources available), feasible within a reasonable time frame, cost-effective, not overly disruptive, and acceptable to key "stakeholders" in the organization. It is important to consider "fits" between resources plus competencies with opportunities, and also fits between risks and expectations. There are four primary steps in this phase: * Reviewing the current key objectives and strategies of the organization, which usually would have been identified and evaluated as part of the diagnosis

* Identifying a rich range of strategic alternatives to address the three levels of strategy formulation outlined below, including but not limited to dealing with the critical issues * Doing a balanced evaluation of advantages and disadvantages of the alternatives relative to their feasibility plus expected effects on the issues and contributions to the success of the organization * Deciding on the alternatives that should be implemented or recommended. In organizations, and in the practice of strategic management, strategies must be implemented to achieve the intended results. The most wonderful strategy in the history of the world is useless if not implemented successfully. This third and final stage in the strategic management process involves developing an implementation plan and then doing whatever it takes to make the new strategy operational and effective in achieving the organization's objectives. The remainder of this chapter focuses on strategy formulation, and is organized into six sections: Three Aspects of Strategy Formulation, Corporate-Level Strategy, Competitive Strategy, Functional Strategy, Choosing Strategies, and Troublesome Strategies. THREE ASPECTS OF STRATEGY FORMULATION:

The following three aspects or levels of strategy formulation, each with a different focus, need to be dealt with in the formulation phase of strategic management. The three sets of recommendations must be internally consistent and fit together in a mutually supportive manner that forms an integrated hierarchy of strategy, in the order given.

Corporate Level Strategy: In this aspect of strategy, we are concerned with broad decisions about the total organization's scope and direction. Basically, we consider what changes should be made in our growth objective and strategy for achieving it, the lines of business we are in, and how these lines of business fit together. It is useful to think of three components of corporate level strategy: (a) growth or directional strategy (what should be our growth objective, ranging from retrenchment through stability to varying degrees of growth - and how do we accomplish this), (b) portfolio strategy (what should be our portfolio of lines of business, which implicitly requires reconsidering how much concentration or diversification we should have), and (c) parenting strategy (how we allocate resources and manage capabilities and activities across the portfolio -- where do we put special emphasis, and how much do we integrate our various lines of business).

Competitive Strategy (often called Business Level Strategy): This involves deciding how the company will compete within each line of business (LOB) or strategic business unit (SBU). Functional Strategy: These more localized and shorter-horizon strategies deal with how each functional area and unit will carry out its functional activities to be effective and maximize resource productivity. CORPORATE LEVEL STRATEGY This comprises the overall strategy elements for the corporation as a whole, the grand strategy, if you please. Corporate strategy involves four kinds of initiatives: * Making the necessary moves to establish positions in different businesses and achieve an appropriate amount and kind of diversification. A key part of corporate strategy is making decisions on how many, what types, and which specific lines of business the company should be in. This may involve deciding to increase or decrease the amount and breadth of diversification. It may involve closing out some LOB's (lines of business), adding others, and/or changing emphasis among LOB's. * Initiating actions to boost the combined performance of the businesses the company has diversified into: This may involve vigorously pursuing rapidgrowth strategies in the most promising LOB's, keeping the other core

businesses healthy, initiating turnaround efforts in weak-performing LOB's with promise, and dropping LOB's that are no longer attractive or don't fit into the corporation's overall plans. It also may involve supplying financial, managerial, and other resources, or acquiring and/or merging other companies with an existing LOB. * Pursuing ways to capture valuable cross-business strategic fits and turn them into competitive advantages -- especially transferring and sharing related technology, procurement leverage, operating facilities, distribution channels, and/or customers. * Establishing investment priorities and moving more corporate resources into the most attractive LOB's. It is useful to organize the corporate level strategy considerations and initiatives into a framework with the following three main strategy components: growth, portfolio, and parenting. These are discussed in the next three sections. What Should be Our Growth Objective and Strategies? Growth objectives can range from drastic retrenchment through aggressive growth. Organizational leaders need to revisit and make decisions about the growth objectives and the fundamental strategies the organization will use to achieve

them. There are forces that tend to push top decision-makers toward a growth stance even when a company is in trouble and should not be trying to grow, for example bonuses, stock options, fame, ego. Leaders need to resist such temptations and select a growth strategy stance that is appropriate for the organization and its situation. Stability and retrenchment strategies are underutilized. Some of the major strategic alternatives for each of the primary growth stances (retrenchment, stability, and growth) are summarized in the following three sub-sections. Growth Strategies All growth strategies can be classified into one of two fundamental categories: concentration within existing industries or diversification into other lines of business or industries. When a company's current industries are attractive, have good growth potential, and do not face serious threats, concentrating resources in the existing industries makes good sense. Diversification tends to have greater risks, but is an appropriate option when a company's current industries have little growth potential or are unattractive in other ways. When an industry consolidates and becomes mature, unless there are other markets to seek (for example other

international markets), a company may have no choice for growth but diversification. There are two basic concentration strategies, vertical integration and horizontal growth. Diversification strategies can be divided into related (or concentric) and unrelated (conglomerate) diversification. Each of the resulting four core categories of strategy alternatives can be achieved internally through investment and development, or externally through mergers, acquisitions, and/or strategic alliances -- thus producing eight major growth strategy categories. Comments about each of the four core categories are outlined below, followed by some key points about mergers, acquisitions, and strategic alliances. 1. Vertical Integration: This type of strategy can be a good one if the company has a strong competitive position in a growing, attractive industry. A company can grow by taking over functions earlier in the value chain that were previously provided by suppliers or other organizations ("backward integration"). This strategy can have advantages, e.g., in cost, stability and quality of components, and making operations more difficult for competitors. However, it also reduces flexibility, raises exit barriers for the company to leave that industry, and prevents the company from seeking the best and latest components from suppliers competing for their business.

A company also can grow by taking over functions forward in the value chain previously provided by final manufacturers, distributors, or retailers ("forward integration"). This strategy provides more control over such things as final products/services and distribution, but may involve new critical success factors that the parent company may not be able to master and deliver. For example, being a world-class manufacturer does not make a company an effective retailer. Some writers claim that backward integration is usually more profitable than forward integration, although this does not have general support. In any case, many companies have moved toward less vertical integration (especially backward, but also forward) during the last decade or so, replacing significant amounts of previous vertical integration with outsourcing and various forms of strategic alliances. 2. Horizontal Growth: This strategy alternative category involves expanding the company's existing products into other locations and/or market segments, or increasing the range of products/services offered to current markets, or a combination of both. It amounts to expanding sideways at the point(s) in the value chain that the company is currently engaged in. One of the primary advantages of this alternative is being able to choose from a fairly continuous range of choices, from modest extensions of present products/markets to major expansions -- each with corresponding amounts of cost and risk.

3. Related Diversification (aka Concentric Diversification): In this alternative, a company expands into a related industry, one having synergy with the company's existing lines of business, creating a situation in which the existing and new lines of business share and gain special advantages from commonalities such as technology, customers, distribution, location, product or manufacturing similarities, and government access. This is often an appropriate corporate strategy when a company has a strong competitive position and distinctive competencies, but its existing industry is not very attractive. 4. Unrelated Diversification (aka Conglomerate Diversification): This fourth major category of corporate strategy alternatives for growth involves diversifying into a line of business unrelated to the current ones. The reasons to consider this alternative are primarily seeking more attractive opportunities for growth in which to invest available funds (in contrast to rather unattractive opportunities in existing industries), risk reduction, and/or preparing to exit an existing line of business (for example, one in the decline stage of the product life cycle). Further, this may be an appropriate strategy when, not only the present industry is unattractive, but the company lacks outstanding competencies that it could transfer to related products or industries. However, because it is difficult to manage and excel in unrelated business units, it can be difficult to realize the hoped-for value added.

Mergers, Acquisitions, and Strategic Alliances: Each of the four growth strategy categories just discussed can be carried out internally or externally, through mergers, acquisitions, and/or strategic alliances. Of course, there also can be a mixture of internal and external actions. Various forms of strategic alliances, mergers, and acquisitions have emerged and are used extensively in many industries today. They are used particularly to bridge resource and technology gaps, and to obtain expertise and market positions more quickly than could be done through internal development. They are particularly necessary and potentially useful when a company wishes to enter a new industry, new markets, and/or new parts of the world. Despite their extensive use, a large share of alliances, mergers, and acquisitions fall far short of expected benefits or are outright failures. For example, one study published in Business Week in 1999 found that 61 percent of alliances were either outright failures or "limping along." Research on mergers and acquisitions includes a Mercer Management Consulting study of all mergers from 1990 to 1996 which found that nearly half "destroyed" shareholder value; an A. T. Kearney study of 115 multibillion-dollar, global mergers between 1993 and 1996 where 58 percent failed to create "substantial returns for shareholders" in the form of dividends and stock price appreciation; and a Price-Waterhouse-Coopers study of 97 acquisitions over $500 million from 1994 to 1997 in which two-thirds

of the buyer's stocks dropped on announcement of the transaction and a third of these were still lagging a year later. Many reasons for the problematic record have been cited, including paying too much, unrealistic expectations, inadequate due diligence, and conflicting corporate cultures; however, the most powerful contributor to success or failure is inadequate attention to the merger integration process. Although the lawyers and investment bankers may consider a deal done when the papers are signed and they receive their fees, this should be merely an incident in a multi-year process of integration that began before the signing and continues far beyond. Stability Strategies There are a number of circumstances in which the most appropriate growth stance for a company is stability, rather than growth. Often, this may be used for a relatively short period, after which further growth is planned. Such circumstances usually involve a reasonable successful company, combined with circumstances that either permit a period of comfortable coasting or suggest a pause or caution. Three alternatives are outlined below, in which the actual strategy actions are similar, but differing primarily in the circumstances motivating the choice of a stability strategy and in the intentions for future strategic actions.

1. Pause and Then Proceed: This stability strategy alternative (essentially a timeout) may be appropriate in either of two situations: (a) the need for an opportunity to rest, digest, and consolidate after growth or some turbulent events before continuing a growth strategy, or (b) an uncertain or hostile environment in which it is prudent to stay in a "holding pattern" until there is change in or more clarity about the future in the environment. 2. No Change: This alternative could be a cop-out, representing indecision or timidity in making a choice for change. Alternatively, it may be a comfortable, even long-term strategy in a mature, rather stable environment, e.g., a small business in a small town with few competitors. 3. Grab Profits While You Can: This is a non-recommended strategy to try to mask a deteriorating situation by artificially supporting profits or their appearance, or otherwise trying to act as though the problems will go away. It is an unstable, temporary strategy in a worsening situation, usually chosen either to try to delay letting stakeholders know how bad things are or to extract personal gain before things collapse. Recent terrible examples in the USA are Enron and WorldCom. Retrenchment Strategies Turnaround: This strategy, dealing with a company in serious trouble, attempts to resuscitate or revive the company through a combination of contraction (general,

major cutbacks in size and costs) and consolidation (creating and stabilizing a smaller, leaner company). Although difficult, when done very effectively it can succeed in both retaining enough key employees and revitalizing the company. Captive Company Strategy: This strategy involves giving up independence in exchange for some security by becoming another company's sole supplier, distributor, or a dependent subsidiary. Sell Out: If a company in a weak position is unable or unlikely to succeed with a turnaround or captive company strategy, it has few choices other than to try to find a buyer and sell itself (or divest, if part of a diversified corporation). Liquidation: When a company has been unsuccessful in or has none of the previous three strategic alternatives available, the only remaining alternative is liquidation, often involving a bankruptcy. There is a modest advantage of a voluntary liquidation over bankruptcy in that the board and top management make the decisions rather than turning them over to a court, which often ignores stockholders' interests.

What Should Be Our Portfolio Strategy? This second component of corporate level strategy is concerned with making decisions about the portfolio of lines of business (LOB's) or strategic business units (SBU's), not the company's portfolio of individual products. Portfolio matrix models can be useful in reexamining a company's present portfolio. The purpose of all portfolio matrix models is to help a company understand and consider changes in its portfolio of businesses, and also to think about allocation of resources among the different business elements. The two primary models are the BCG Growth-Share Matrix and the GE Business Screen (Porter, 1980, has a good summary of these). These models consider and display on a two-dimensional graph each major SBU in terms of some measure of its industry attractiveness and its relative competitive strength The BCG Growth-Share Matrix model considers two relatively simple variables: growth rate of the industry as an indication of industry attractiveness, and relative market share as an indication of its relative competitive strength. The GE Business Screen, also associated with McKinsey, considers two composite variables, which can be customized by the user, for (a) industry attractiveness (e.g, one could include industry size and growth rate, profitability, pricing practices, favored treatment in government dealings, etc.) and (b) competitive strength (e.g., market share, technological position, profitability, size, etc.)

The best test of the business portfolio's overall attractiveness is whether the combined growth and profitability of the businesses in the portfolio will allow the company to attain its performance objectives. Related to this overall criterion are such questions as: * Does the portfolio contain enough businesses in attractive industries? * Does it contain too many marginal businesses or question marks? * Is the proportion of mature/declining businesses so great that growth will be sluggish? * Are there some businesses that are not really needed or should be divested? * Does the company have its share of industry leaders, or is it burdened with too many businesses in modest competitive positions? * Is the portfolio of SBU's and its relative risk/growth potential consistent with the strategic goals? * Do the core businesses generate dependable profits and/or cash flow? * Are there enough cash-producing businesses to finance those needing cash * Is the portfolio overly vulnerable to seasonal or recessionary influences? * Does the portfolio put the corporation in good position for the future?

It is important to consider diversification vs. concentration while working on portfolio strategy, i.e., how broad or narrow should be the scope of the company. It is not always desirable to have a broad scope. Single-business strategies can be very successful (e.g., early strategies of McDonald's, Coca-Cola, and BIC Pen). Some of the advantages of a narrow scope of business are: (a) less ambiguity about who we are and what we do; (b) concentrates the efforts of the total organization, rather than stretching them across many lines of business; (c) through extensive hands-on experience, the company is more likely to develop distinctive competence; and (d) focuses on long-term profits. However, having a single business puts "all the eggs in one basket," which is dangerous when the industry and/or technology may change. Diversification becomes more important when market growth rate slows. Building stable shareholder value is the ultimate justification for diversifying -- or any strategy. What Should Be Our Parenting Strategy? This third component of corporate level strategy, relevant for a multi-business company (it is moot for a single-business company), is concerned with how to allocate resources and manage capabilities and activities across the portfolio of businesses. It includes evaluating and making decisions on the following: * Priorities in allocating resources (which business units will be stressed)

* What are critical success factors in each business unit, and how can the company do well on them * Coordination of activities (e.g., horizontal strategies) and transfer of capabilities among business units * How much integration of business units is desirable. COMPETITIVE (BUSINESS LEVEL) STRATEGY In this second aspect of a company's strategy, the focus is on how to compete successfully in each of the lines of business the company has chosen to engage in. The central thrust is how to build and improve the company's competitive position for each of its lines of business. A company has competitive advantage whenever it can attract customers and defend against competitive forces better than its rivals. Companies want to develop competitive advantages that have some sustainability (although the typical term "sustainable competitive advantage" is usually only true dynamically, as a firm works to continue it). Successful competitive strategies usually involve building uniquely strong or distinctive competencies in one or several areas crucial to success and using them to maintain a competitive edge over rivals. Some examples of distinctive competencies are superior technology and/or product features, better manufacturing technology and skills, superior sales and distribution capabilities, and better customer service and convenience.

Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value. (Michael E. Porter) The essence of strategy lies in creating tomorrow's competitive advantages faster than competitors mimic the ones you possess today. (Gary Hamel & C. K. Prahalad) We will consider competitive strategy by using Porter's four generic strategies (Porter 1980, 1985) as the fundamental choices, and then adding various competitive tactics. Porter's Four Generic Competitive Strategies He argues that a business needs to make two fundamental decisions in establishing its competitive advantage: (a) whether to compete primarily on price (he says "cost," which is necessary to sustain competitive prices, but price is what the customer responds to) or to compete through providing some distinctive points of differentiation that justify higher prices, and (b) how broad a market target it will aim at (its competitive scope). These two choices define the following four generic competitive strategies. which he argues cover the fundamental range of choices. A fifth strategy alternative (best-cost provider) is added by some sources, although not by Porter, and is included below:

1. Overall Price (Cost) Leadership: appealing to a broad cross-section of the market by providing products or services at the lowest price. This requires being the overall low-cost provider of the products or services (e.g., Costco, among retail stores, and Hyundai, among automobile manufacturers). Implementing this strategy successfully requires continual, exceptional efforts to reduce costs -without excluding product features and services that buyers consider essential. It also requires achieving cost advantages in ways that are hard for competitors to copy or match. Some conditions that tend to make this strategy an attractive choice are: * The industry's product is much the same from seller to seller * The marketplace is dominated by price competition, with highly pricesensitive buyers * There are few ways to achieve product differentiation that have much value to buyers * Most buyers use product in same ways -- common user requirements * Switching costs for buyers are low * Buyers are large and have significant bargaining power

2. Differentiation: appealing to a broad cross-section of the market through offering differentiating features that make customers willing to pay premium prices, e.g., superior technology, quality, prestige, special features, service, convenience (examples are Nordstrom and Lexus). Success with this type of strategy requires differentiation features that are hard or expensive for competitors to duplicate. Sustainable differentiation usually comes from advantages in core competencies, unique company resources or capabilities, and superior management of value chain activities. Some conditions that tend to favor differentiation strategies are: * There are multiple ways to differentiate the product/service that buyers think have substantial value * Buyers have different needs or uses of the product/service * Product innovations and technological change are rapid and competition emphasizes the latest product features * Not many rivals are following a similar differentiation strategy 3. Price (Cost) Focus: a market niche strategy, concentrating on a narrow customer segment and competing with lowest prices, which, again, requires having lower cost structure than competitors (e.g., a single, small shop on a side-street in a town, in which they will order electronic equipment at low prices, or the cheapest

automobile made in the former Bulgaria). Some conditions that tend to favor focus (either price or differentiation focus) are: * The business is new and/or has modest resources * The company lacks the capability to go after a wider part of the total market * Buyers' needs or uses of the item are diverse; there are many different niches and segments in the industry * Buyer segments differ widely in size, growth rate, profitability, and intensity in the five competitive forces, making some segments more attractive than others * Industry leaders don't see the niche as crucial to their own success * Few or no other rivals are attempting to specialize in the same target segment 4. Differentiation Focus: a second market niche strategy, concentrating on a narrow customer segment and competing through differentiating features (e.g., a high-fashion women's clothing boutique in Paris, or Ferrari). Best-Cost Provider Strategy: (although not one of Porter's basic four strategies, this strategy is mentioned by a number of other writers.) This is a strategy of

trying to give customers the best cost/value combination, by incorporating key good-or-better product characteristics at a lower cost than competitors. This strategy is a mixture or hybrid of low-price and differentiation, and targets a segment of value-conscious buyers that is usually larger than a market niche, but smaller than a broad market. Successful implementation of this strategy requires the company to have the resources, skills, capabilities (and possibly luck) to incorporate up-scale features at lower cost than competitors. This strategy could be attractive in markets that have both variety in buyer needs that make differentiation common and where large numbers of buyers are sensitive to both price and value. Porter might argue that this strategy is often temporary, and that a business should choose and achieve one of the four generic competitive strategies above. Otherwise, the business is stuck in the middle of the competitive marketplace and will be out-performed by competitors who choose and excel in one of the fundamental strategies. His argument is analogous to the threats to a tennis player who is standing at the service line, rather than near the baseline or getting to the net. However, others present examples of companies (e.g., Honda and Toyota) who seem to be able to pursue successfully a best-cost provider strategy, with stability.

Competitive Tactics Although a choice of one of the generic competitive strategies discussed in the previous section provides the foundation for a business strategy, there are many variations and elaborations. Among these are various tactics that may be useful (in general, tactics are shorter in time horizon and narrower in scope than strategies). This section deals with competitive tactics, while the following section discusses cooperative tactics. Two categories of competitive tactics are those dealing with timing (when to enter a market) and market location (where and how to enter and/or defend). Timing Tactics: When to make a strategic move is often as important as what move to make. We often speak of first-movers (i.e., the first to provide a product or service), second-movers or rapid followers, and late movers (wait-andsee). Each tactic can have advantages and disadvantages. Being a first-mover can have major strategic advantages when: (a) doing so builds an important image and reputation with buyers; (b) early adoption of new technologies, different components, exclusive distribution channels, etc. can produce cost and/or other advantages over rivals; (c) first-time customers remain strongly loyal in making repeat purchases; and (d) moving first makes entry and imitation by competitors hard or unlikely.

However, being a second- or late-mover isn't necessarily a disadvantage. There are cases in which the first-mover's skills, technology, and strategies are easily copied or even surpassed by later-movers, allowing them to catch or pass the first-mover in a relatively short period, while having the advantage of minimizing risks by waiting until a new market is established. Sometimes, there are advantages to being a skillful follower rather than a first-mover, e.g., when: (a) being a first-mover is more costly than imitating and only modest experience curve benefits accrue to the leader (followers can end up with lower costs than the firstmover under some conditions); (b) the products of an innovator are somewhat primitive and do not live up to buyer expectations, thus allowing a clever follower to win buyers away from the leader with better performing products; (c) technology is advancing rapidly, giving fast followers the opening to leapfrog a first-mover's products with more attractive and full-featured second- and thirdgeneration products; and (d) the first-mover ignores market segments that can be picked up easily. Market Location Tactics: These fall conveniently into offensive and defensive tactics. Offensive tactics are designed to take market share from a competitor, while defensive tactics attempt to keep a competitor from taking away some of our present market share, under the onslaught of offensive tactics by the competitor. Some offensive tactics are:

* Frontal Assault: going head-to-head with the competitor, matching each other in every way. To be successful, the attacker must have superior resources and be willing to continue longer than the company attacked. * Flanking Maneuver: attacking a part of the market where the competitor is weak. To be successful, the attacker must be patient and willing to carefully expand out of the relatively undefended market niche or else face retaliation by an established competitor. * Encirclement: usually evolving from the previous two, encirclement involves encircling and pushing over the competitor's position in terms of greater product variety and/or serving more markets. This requires a wide variety of abilities and resources necessary to attack multiple market segments. * Bypass Attack: attempting to cut the market out from under the established defender by offering a new, superior type of produce that makes the competitor's product unnecessary or undesirable. * Guerrilla Warfare: using a "hit and run" attack on a competitor, with small, intermittent assaults on different market segments. This offers the possibility for even a small firm to make some gains without seriously

threatening a large, established competitor and evoking some form of retaliation. Some Defensive Tactics are: * Raise Structural Barriers: block avenues challengers can take in mounting an offensive * Increase Expected Retaliation: signal challengers that there is threat of strong retaliation if they attack * Reduce Inducement for Attacks: e.g., lower profits to make things less attractive (including use of accounting techniques to obscure true profitability). Keeping prices very low gives a new entrant little profit incentive to enter. The general experience is that any competitive advantage currently held will eventually be eroded by the actions of competent, resourceful competitors. Therefore, to sustain its initial advantage, a firm must use both defensive and offensive strategies, in elaborating on its basic competitive strategy. Cooperative Strategies Another group of "competitive" tactics involve cooperation among companies. These could be grouped under the heading of various types of strategic

alliances, which have been discussed to some extent under Corporate Level growth strategies. These involve an agreement or alliance between two or more businesses formed to achieve strategically significant objectives that are mutually beneficial. Some are very short-term; others are longer-term and may be the first stage of an eventual merger between the companies. Some of the reasons for strategic alliances are to: obtain/share technology, share manufacturing capabilities and facilities, share access to specific markets, reduce financial/political/market risks, and achieve other competitive advantages not otherwise available. There could be considered a continuum of types of strategic alliances, ranging from: (a) mutual service consortiums (e.g., similar companies in similar industries pool their resources to develop something that is too expensive alone), (b) licensing arrangements, (c) joint ventures (an independent business entity formed by two or more companies to accomplish certain things, with allocated ownership, operational responsibilities, and financial risks and rewards), (d) value-chain partnerships (e.g., just-in-time supplier relationships, and out-sourcing of major value-chain functions). FUNCTIONAL STRATEGIES Functional strategies are relatively short-term activities that each functional area within a company will carry out to implement the broader, longer-term corporate

level and business level strategies. Each functional area has a number of strategy choices, that interact with and must be consistent with the overall company strategies. Three basic characteristics distinguish functional strategies from corporate level and business level strategies: shorter time horizon, greater specificity, and primary involvement of operating managers. A few examples follow of functional strategy topics for the major functional areas of marketing, finance, production/operations, research and development, and human resources management. Each area needs to deal with sourcing strategy, i.e., what should be done in-house and what should be outsourced? Marketing strategy deals with product/service choices and features, pricing strategy, markets to be targeted, distribution, and promotion considerations. Financial strategies include decisions about capital acquisition, capital allocation, dividend policy, and investment and working capital management. The production or operations functional strategies address choices about how and where the products or services will be manufactured or delivered, technology to be used, management of resources, plus purchasing and relationships with suppliers. For firms in high-tech industries, R&D strategy may be so central that many of the decisions will be made at the business or even corporate level, for example the role of technology in the company's competitive strategy, including choices between

being a technology leader or follower. However, there will remain more specific decisions that are part of R&D functional strategy, such as the relative emphasis between product and process R&D, how new technology will be obtained (internal development vs. external through purchasing, acquisition, licensing, alliances, etc.), and degree of centralization for R&D activities. Human resources functional strategy includes many topics, typically recommended by the human resources department, but many requiring top management approval. Examples are job categories and descriptions; pay and benefits; recruiting, selection, and orientation; career development and training; evaluation and incentive systems; policies and discipline; and management/executive selection processes. CHOOSING THE BEST STRATEGY ALTERNATIVES Decision making is a complex subject, worthy of a chapter or book of its own. This section can only offer a few suggestions. Among the many sources for additional information, I recommend Harrison (1999), McCall & Kaplan (1990), and Williams (2002). Here are some factors to consider when choosing among alternative strategies: * It is important to get as clear as possible about objectives and decision criteria (what makes a decision a "good" one?)

* The primary answer to the previous question, and therefore a vital criterion, is that the chosen strategies must be effective in addressing the "critical issues" the company faces at this time * They must be consistent with the mission and other strategies of the organization * They need to be consistent with external environment factors, including realistic assessments of the competitive environment and trends * They fit the company's product life cycle position and market attractiveness/competitive strength situation * They must be capable of being implemented effectively and efficiently, including being realistic with respect to the company's resources * The risks must be acceptable and in line with the potential rewards * It is important to match strategy to the other aspects of the situation, including: (a) size, stage, and growth rate of industry; (b) industry characteristics, including fragmentation, importance of technology, commodity product orientation, international features; and (c) company position (dominant leader, leader, aggressive challenger, follower, weak, "stuck in the middle")

* Consider stakeholder analysis and other people-related factors (e.g., internal and external pressures, risk propensity, and needs and desires of important decision-makers) * Sometimes it is helpful to do scenario construction, e.g., cases with optimistic, most likely, and pessimistic assumptions. SOME TROUBLESOME STRATEGIES TO AVOID OR USE WITH CAUTION Follow the Leader: when the market has no more room for copycat products and look-alike competitors. Sometimes such a strategy can work fine, but not without careful consideration of the company's particular strengths and weaknesses. (e.g., Fujitsu Ltd. was driven since the 1960s to catch up to IBM in mainframes and continued this quest even into the 1990s after mainframes were in steep decline; or the decision by Standard Oil of Ohio to follow Exxon and Mobil Oil into conglomerate diversification) Count On Hitting Another Home Run: e.g., Polaroid tried to follow its early success with instant photography by developing "Polavision" during the mid1970s. Unfortunately, this very expensive, instant developing, 8mm, black and white, silent motion picture camera and film was displayed at a stockholders' meeting about the time that the first beta-format video recorder was released by

Sony. Polaroid reportedly wrote off at least $500 million on this venture without selling a single camera. Try to Do Everything: establishing many weak market positions instead of a few strong ones Arms Race: Attacking the market leaders head-on without having either a good competitive advantage or adequate financial strength; making such aggressive attempts to take market share that rivals are provoked into strong retaliation and a costly "arms race." Such battles seldom produce a substantial change in market shares; usual outcome is higher costs and profitless sales growth Put More Money On a Losing Hand: one version of this is allocating R&D efforts to weak products instead of strong products (e.g., Polavision again, Pan Am's attempt to continue global routes in 1987) Over-optimistic Expansion: Using high debt to finance investments in new facilities and equipment, then getting trapped with high fixed costs when demand turns down, excess capacity appears, and cash flows are tight Unrealistic Status-Climbing: Going after the high end of the market without having the reputation to attract buyers looking for name-brand, prestige goods (e.g., Sears' attempts to introduce designer women's clothing)

Selling the Sizzle Without the Steak: Spending more money on marketing and sales promotions to try to get around problems with product quality and performance. Depending on cosmetic product improvements to serve as a substitute for real innovation and extra customer value. selected References: Harrison, E. Frank (1999). The Managerial Decision-Making Process (5th ed.). Boston: Houghton Mifflin. McCall, Morgan W., Jr., & Kaplan, Robert K. (1990). Whatever it takes: The realities of managerial decision making (2nd ed.). Englewood Cliffs, NJ: PrenticeHall. Porter, Michael E. (1980). Competitive Strategy: Techniques for analyzing industries and competitors. New York: Free Press. Porter, Michael E. (1985). Competitive advantage: Creating and sustaining superior performance. New York: Free Press. Williams, Steve W. (2002). Making better business decisions: Understanding and improving critical thinking and problem solving skills. Thousand Oaks, CA: Sage Publications. Steps in Strategy Formulation Process

Strategy formulation refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives and thereby achieving the organizational vision. The process of strategy formulation basically involves six main steps. Though these steps do not follow a rigid chronological order, however they are very rational and can be easily followed in this order. 1. Setting Organizations objectives - The key component of any strategy statement is to set the long-term objectives of the organization. It is known that strategy is generally a medium for realization of organizational objectives. Objectives stress the state of being there whereas Strategy stresses upon the process of reaching there. Strategy includes both the fixation of objectives as well the medium to be used to realize those objectives. Thus, strategy is a wider term which believes in the manner of deployment of resources so as to achieve the objectives. 2. While fixing the organizational objectives, it is essential that the factors which influence the selection of objectives must be analyzed before the selection of objectives. Once the objectives and the factors influencing strategic decisions have been determined, it is easy to take strategic decisions.

3. Evaluating the Organizational Environment - The next step is to evaluate the general economic and industrial environment in which the organization operates. This includes a review of the organizations competitive position. It is essential to conduct a qualitative and quantitative review of an organizations existing product line. The purpose of such a review is to make sure that the factors important for competitive success in the market can be discovered so that the management can identify their own strengths and weaknesses as well as their competitors strengths and weaknesses. After identifying its strengths and weaknesses, an organization must keep a track of competitors moves and actions so as to discover probable opportunities of threats to its market or supply sources. 4. Setting Quantitative Targets - In this step, an organization must practically fix the quantitative target values for some of the organizational objectives. The idea behind this is to compare with long term customers, so as to evaluate the contribution that might be made by various product zones or operating departments. 5. Aiming in context with the divisional plans - In this step, the contributions made by each department or division or product category within the

organization is identified and accordingly strategic planning is done for each sub-unit. This requires a careful analysis of macroeconomic trends. 6. Performance Analysis - Performance analysis includes discovering and analyzing the gap between the planned or desired performance. A critical evaluation of the organizations past performance, present condition and the desired future conditions must be done by the organization. This critical evaluation identifies the degree of gap that persists between the actual reality and the long-term aspirations of the organization. An attempt is made by the organization to estimate its probable future condition if the current trends persist. 7. Choice of Strategy - This is the ultimate step in Strategy Formulation. The best course of action is actually chosen after considering organizational goals, organizational strengths, potential and limitations as well as the external opportunities. http://www.managementstudyguide.com/strategicmanagement.htm

STRATEGIC VISION AND MISSION Though sounding cliched, Vision & Mission statement can do a lot to alignment. It is important that the same is worded and articulated in a way

the people can relate to them and also find it linked to their job. Strategic Vision Statement What is a vision: Vision statement provides direction and inspiration for organizational goal setting. Vision is where you see your self at the end of the horizon OR milestone therein. It is a single statement dream OR aspiration. Typically a vision has the flavors of 'Being Most admired', 'Among the top league', 'Being known for innovation', 'being largest and greatest' and so on. Typically 'most profitable', 'Cheapest' etc. dont figure in vision statement. Unlike goals, vision is not SMART. It does not have mathematics OR timelines attached to it. Vision is a symbol, and a cause to which we want to bond the stakeholders, (mostly employees and sometime share-holders). As they say, the people work best, when they are working for a cause, than for a goal. Vision provides them that cause. Vision is long-term statement and typically generic & grand. Therefore a vision

statement does not change unless the company is getting into a totally different kind of business. Vision should never carry the 'how' part of vision. For example ' To be the most admired brand in Aviation Industry' is a fine vision statement, which can be spoiled by extending it to' To be the most admired brand in the Aviation Industry by providing world-class in-flight services'. The reason for not including 'how' is that 'how' may keep on changing with time. Challenges related to Vision Statement: Putting-up a vision is not a challenge. The problem is to make employees engaged with it. Many a time, terms like vision, mission and strategy become more a subject of scorn than being looked up-to. This is primarily because leaders may not be able to make a connect between the vision/mission and peoples every day work. Too often, employees see a gap between the vision, mission and their goals & priorities. Even if there is a valid/tactical reason for this mis-match, it is not explained. Horizon of Vision: Vision should be the horizon of 5-10 years. If it is less than that, it becomes

tactical. If it is of a horizon of 20+ years (say), it becomes difficult for the strategy to relate to the vision. Features of a good vision statement:

Easy to read and understand. Compact and Crisp to leave something to peoples imagination. Gives the destination and not the road-map. Is meaningful and not too open ended and far-fetched. Excite people and make them get goose-bumps. Provides a motivating force, even in hard times. Is perceived as achievable and at the same time is challenging and compelling, stretching us beyond what is comfortable.

Vision is a dream/aspiration, fine-tuned to reality: The Entire process starting from Vision down to the business objectives, is highly iterative. The question is from where should we start. We strongly recommend that vision and mission statement should be made first without being colored by constraints, capabilities and environment. This can said akin to the vision of armed forces, thats 'Safe and Secure country from external threats '. This vision is a nonnegotiable and it drives the organization to find ways and means to achieve their

vision, by overcoming constraints on capabilities and resources. Vision should be a stake in the ground, a position, a dream, which should be prudent, but should be non-negotiable barring few rare circumstances. Mission Statement What is a mission: Mission of an organization is the purpose for which the organization is. Mission is again a single statement, and carries the statement in verb. Mission in one way is the road to achieve the vision. For example, for a luxury products company, the vision could be 'To be among most admired luxury brands in the world' and mission could be 'To add style to the lives' A good mission statement will be :

Clear and Crisp: While there are different views, We strongly recommend that mission should only provide what, and not 'how and when'. We would prefer the mission of 'Making People meet their career' to 'Making people meet their career through effective career counseling and education'. A mission statement without 'how & when' element leaves a creative space with the organization to enable them take-up wider strategic choices.

Have to have a very visible linkage to the business goals and strategy: For example you cannot have a mission (for a home furnishing company) of 'Bringing Style to Peoples lives' while your strategy asks for mass product and selling. Its better that either you start selling high-end products to high value customers, OR change your mission statement to 'Help people build homes'.

Should not be same as the mission of a competing organization. It should touch upon how its purpose it unique.

Mission follows the Vision: The Entire process starting from Vision down to the business objectives, is highly iterative. The question is from where should be start. I strongly recommend that mission should follow the vision. This is because the purpose of the organization could change to achieve their vision. For example to achieve the vision of an Insurance company 'To be the most trusted Insurance Company', the mission could be first 'making people financially secure' as their emphasis is on Traditional Insurance product. At a later stage the company can make its mission as 'Making money work for the people' when they also include the non-traditional unit linked investment products.

STRATEGIC OBJECTIVES Clearly stated strategic objectives, the third step of strategy formulation, outline the position in the marketplace that the firm seeks. Performance targets state the measurable milestones that the firm needs to reach or obtain to achieve its strategic objectives. Some strategic objectives relate to the positioning of goods and services in the competitive marketplace while others concern the structure of the company itself and how it plans to produce goods or manage its operations. Typical strategic objectives involve profitability, market share, return on investment, technological achievement, customer service level, revenue size, and diversification. In order to make strategic planning work, the goals, missions, objectives, performance targets, or other hopes of top management must somehow be made real by others in more distant locations down the organizational chart. Merely communicating to each member of the business the vision that top management has for the firm is not sufficient. Strategic objectives and performance targets should penetrate every corner of the organizational chart. There should be a hierarchy of strategic formulation starting with the highest levels of the firm, from

which it is consistently translated from level to level so that each department knows what its contribution to the overall mission of the firm is to be. This process should end with each individual in the firm having strategic objectives and performance targets tailored to their specific role in the firm. http://www.referenceforbusiness.com/encyclopedia/Str-The/StrategyFormulation.html

Financial Objectives The business plan financial objectives involve measuring financial performance to reflect the total operational performance. The aim in managing this performance should be to maximise net profit and net cash surpluses of the operation. The two main measures, therefore, are net profit and net cash flow. Each indicator for any given period is calculated as follows:

Total income (revenue) less direct costs (or C.O.G.S.) equals gross profit (contribution margin) and gross profit less operating costs (cost of running the business) is equal to net profit.

Total receipts (inflows) less total payments (outflows) is equal to net cash flow surplus. Net profit is calculated as the excess of income (revenue) over expenses of the operation for a given period. Income (revenue) is the earnings of the business and expenses are it's running costs. Net cash flow surplus is calculated as the excess of receipts (inflows) over payments for a given period. Receipts are the cash inflows of the business, payments are it's cash outflows or outgoings. See also performance metrics

Financial Plan Outline 1) Break even analysis One of the main financial objectives is to perform a break even analysis. This should be done before preparing the final financial plans for your operation. You should know the sales break-even point, that is, the level of sales necessary to meet the total business running costs. You can also use break-even analysis to determine the level of sales to achieve a desired profit target. See also sales break even point

2) Categorise costs as fixed or variable Fixed costs are constant. They do not change when sales levels change provided the business does not change its operating capacity. Variable costs change proportionally to changes in business activity. When sale levels change, these costs also change (up or down). Examples of variable costs are stock purchases, raw material purchases, and direct costs (job material purchases). 3) Calculate the contribution margin This is a key area of the financial objectives. The sales income of the business must be enough to cover it's variable costs and it's fixed cost's as well as the required profit. The contribution margin is the excess of sales income over the variable costs of the business for the period (sales less direct costs). The contribution margin measures how much sales contribute towards meeting fixed costs and the desired net profit of the business. This is the one of the key financial objectives, as without sufficient contribution margin you cannot meet your operating costs and you will be in negative net profit territory. See also performance metrics 4) Calculate the break-even point With a knowledge of the contribution margin (% to sales), you can find the

business's break-even point, the level at which income equals expenses (direct costs and overheads or expenses), so that neither a profit or a loss is made (in the net profit line of your profit and loss report). See also sales break even point. 5) Financial Forecasts sales Sales forecasts should be the first forecasts made when planning profit and overall financial objectives. The sales forecast is of prime importance because it influences many of the cost forecasts for your business. 6) Forecast profit statements Prepare a forecast profit statement showing the annual net profit target for the business for each year. See also performance metrics 7) Forecast capital expenditure requirements Prepare an annual capital expenditure forecast for each year. This shows details of your proposed capital expenditure for the period in the business plan. 8) Forecast cash flow After you have prepared the forecast profit and capital expenditure statements, you can now prepare cash flow statements for each year of the business plan. Potential lenders will critically analyse your cash flow forecasts to determine your ability to meet loan repayments.

A cash flow statement shows the intended cash receipts and payments of the business over the period of the business plan, which then allows the cash flow to be calculated. A forecast cash flow statement shows the cash receipts (inflows) and payments (outflows) of the operation, which enables future cash positions to be predicted. This is one of the key financial objectives of your business, and dictates any required level of funding over the coming trading period (budget year). 9) Financial Ratios The calculation of financial ratios provides a useful summary of the acceptability of forecasts. They can be used to identify strengths and weaknesses in planned operating activities. Ratios are compared with standard benchmarks such as industry averages for acceptability. Ratios should also be improving over time. The identification of any unacceptable ratios should cause you to review and adjust relevant sections of the operational plan to produce satisfactory forecasts and results. For a comprehensive understanding of financial ratios see our eBook relationships that show the health of your business.

10) Financial records You will need to design a comprehensive record system that records the financial transactions of the business. Financial records are necessary for the financial control of the operation. Records of financial transactions enable accurate reports to be prepared for monitoring the financial results of the operation. Financial results are compared with corresponding targets to identify any unsatisfactory performance so that follow up action can be taken. 11) Business insurance Plan what types of insurance will be required for the business now and for the period of the plan, the types of insurance might include public liability (usually the minimum) and professional indemnity. Comprehensive insurance cover should be arranged and maintained for your business operation to minimise exposure to daily risks which can cause financial losses. 12) Financial controls The final area of financial objectives is to establish the financial controls for your business. After you have designed your financial record keeping system, you should then decide what financial controls to adopt for your business operation. Financial controls are the methods or techniques you will use to monitor and evaluate the financial results of your operation. Key financial results are 'profit',

'cash flow' and 'financial position'. See also performance metrics

Understanding the financial objectives for your business operation is essential if your business is to be successful. Many business fail because they do not take time out to first establish these, and then to monitor them. These are your "stakes in the ground" which ultimately support the structure of your business!

The Balanced Scorecard

Traditional financial reporting systems provide an indication of how a firm has performed in the past, but offer little information about how it might perform in the future. For example, a firm might reduce its level of customer service in order to boost current earnings, but then future earnings might be negatively impacted due to reduced customer satisfaction. To deal with this problem, Robert Kaplan and David Norton developed the Balanced Scorecard, a performance measurement system that considers not

only financial measures, but also customer, business process, and learning measures. The Balanced Scorecard framework is depicted in the following diagram:

Diagram of the Balanced Scorecard

Financial

Business Customer Strategy Processes

Learning & Growth

The balanced scorecard translates the organization's strategy into four perspectives, with a balance between the following:

between internal and external measures between objective measures and subjective measures between performance results and the drivers of future results

Beyond the Financial Perspective In the industrial age, most of the assets of a firm were in property, plant, and equipment, and the financial accounting system performed an adequate job of valuing those assets. In the information age, much of the value of the firm is embedded in innovative processes, customer relationships, and human resources. The financial accounting system is not so good at valuing such assets. The Balanced Scorecard goes beyond standard financial measures to include the following additional perspectives: the customer perspective, the internal process perspective, and the learning and growth perspective.

Financial perspective - includes measures such as operating income, return on capital employed, and economic value added.

Customer perspective - includes measures such as customer satisfaction, customer retention, and market share in target segments.

Business process perspective - includes measures such as cost, throughput, and quality. These are for business processes such as procurement, production, and order fulfillment.

Learning & growth perspective - includes measures such as employee satisfaction, employee retention, skill sets, etc.

These four realms are not simply a collection of independent perspectives. Rather, there is a logical connection between them - learning and growth lead to better business processes, which in turn lead to increased value to the customer, which finally leads to improved financial performance. Objectives, Measures, Targets, and Initiatives Each perspective of the Balanced Scorecard includes objectives, measures of those objectives, target values of those measures, and initiatives, defined as follows:

Objectives - major objectives to be achieved, for example, profitable growth.

Measures - the observable parameters that will be used to measure progress toward reaching the objective. For example, the objective of profitable growth might be measured by growth in net margin.

Targets - the specific target values for the measures, for example, +2% growth in net margin.

Initiatives - action programs to be initiated in order to meet the objective.

These can be organized for each perspective in a table as shown below.

Objectives Measures Targets Initiatives Financial Customer Process Learning

Balanced Scorecard as a Strategic Management System: The Balanced Scorecard originally was conceived as an improved performance measurement system. However, it soon became evident that it could be used as a management system to implement strategy at all levels of the organization by facilitating the following functions:

1. Clarifying strategy - the translation of strategic objectives into quantifiable measures clarifies the management team's understanding of the strategy and helps to develop a coherent consensus. 2. Communicating strategic objectives - the Balanced Scorecard can serve to translate high level objectives into operational objectives and communicate the strategy effectively throughout the organization. 3. Planning, setting targets, and aligning strategic initiatives - ambitious but achievable targets are set for each perspective and initiatives are developed to align efforts to reach the targets. 4. Strategic feedback and learning - executives receive feedback on whether the strategy implementation is proceeding according to plan and on whether the strategy itself is successful ("double-loop learning"). These functions have made the Balanced Scorecard an effective management system for the implementation of strategy. The Balanced Scorecard has been applied successfully to private sector companies, non-profit organizations, and government agencies. The Balanced Scorecard was introduced as one of the newest management tools. The purpose was to allow organizations to be better able to use their intangible assets. The balanced scorecard is to be used as a supplement to

traditional financial measures. It measures performance from three additional perspectives; customers, internal business processes, and learning and growth. The scorecard can help top-level management link the long-term strategy with the short-term actions. Managers using a balanced scorecard do not only have to rely on the short-term financial results as indicators of the companys progress. It brings in other indicators that provide information about how the short-term results have affected the long-term strategy. The scorecard allows managers to introduce four new processes; 1. translating the vision, 2. communicating and linking, 3. business planning, and 4. feedback and learning. Translating the vision is a means of expressing the mission/vision statements with an integrated set of objectives and measures. This forces the top management to develop operational measures, which requires them to discuss, and eventually agree on, a means of achieving the goals of the company. Communicating and linking is a process that facilitates the communication of strategies throughout the entire organization. Departmental and individual objectives must be aligned with the strategy through evaluation procedures and

incentives. To have goal congruence between the individual employees and the company, scorecard users engage in three activities: communicating and educating, setting goals, and linking rewards to performance measures which are in turn linked to the overall strategy. Communicating and educating is achieved by maintaining policies that ensure all employees are aware of the strategies of the organization. Also, it is important for the lower level employees to be able to communicate upwards about whether or not the strategies are realistic from the competitive or operational perspective. Setting goals alone is not sufficient to change employees mind -set. One technique to ensure the objectives related to the goals are achieved is the use of a personal scorecard. It is simply a card that has information that describes corporate objectives, measures, and targets. Employees would carry it with them. This allows employees to better translate these objectives into meaningful tasks that will help reach these goals. Linking rewards to performance is an important incentive to help an organization achieve its purpose. What the balanced scorecard adds to the traditional means of linking rewards to financial performance is that it takes a more holistic look at the organization. It ensures that the correct criteria are used as a measure of performance before rewards are given. The idea is that, if you are not using the

correct indicators to evaluate performance, there is a high risk in rewarding this behavior. Business planning is the third process used by managers with the balanced scorecard. By using the scorecard, businesses will integrate their strategic planning and budgeting processes. This makes sure that the budgets support the strategies of the company. The users of the scorecard pick measures that represent each of the four perspectives, and then set targets for each. Then they will decide which specific actions will help them in reaching those targets. Using short-term milestones to evaluate the progress toward the strategic goal is what results from using the balanced scorecard. The fourth, and final, process is feedback and learning. With the balanced scorecard in place managers can monitor feedback and relate this to the strategy. The first three processes are very important, but they demand a constant objective. Any deviation from the plan is considered a defect. By adding the feedback and learning process, the scorecard becomes balanced by providing real time information to enhance strategic learning. The balanced scorecard supplies three essential items to strategic learning.

First, it articulates the vision. The holistic vision is communicated to the entire

organization, and the individual efforts are linked to business unit objectives.

Second, the scorecard supplies a strategic feedback system.This system views the strategies as hypotheses, and should be able to test, validate, and modify these hypotheses.

Third, the balanced scorecard facilitates strategy review. Instead of using periodic meetings to evaluate past performances as the traditional financial review process does, scorecard users review the feedback in a way to gain a better understanding of if the strategy is being reached, how is it being reached, and should the strategy be modified based on new information. This gives the organization a forward focus. The balanced scorecard facilitates an organization's plan to align management processes and focuses with the long-term strategy of the company. Without the scorecard it would be nearly impossible to maintain a consistency of vision and action while attempting to introduce new strategies and processes. The balanced

scorecard provides a framework for managing the implementation of a strategy, while also allowing the strategy to evolve in response to changes in the companys competitive, market, and technological environments. The Strategic Planning Process In the 1970's, many large firms adopted a formalized top-down strategic planning model. Under this model, strategic planning became a deliberate process in which top executives periodically would formulate the firm's strategy, then communicate it down the organization for implementation. The following is a flowchart model of this process: The Strategic Planning Process

Mission

| V

Objectives

Situation Analysis

| V

Strategy Formulation

| V

Implementation

| V

Control

This process is most applicable to strategic management at the business unit level of the organization. For large corporations, strategy at the corporate level is more concerned with managing a portfolio of businesses. For example, corporate level strategy involves decisions about which business units to grow, resource allocation among the business units, taking advantage of synergies among the business units, and mergers and acquisitions. In the process outlined here, "company" or "firm" will be used to denote a single-business firm or a single business unit of a diversified firm. Mission A company's mission is its reason for being. The mission often is expressed in the form of a mission statement, which conveys a sense of purpose to employees and projects a company image to customers. In the strategy formulation process, the mission statement sets the mood of where the company should go. Objectives Objectives are concrete goals that the organization seeks to reach, for example, an earnings growth target. The objectives should be challenging but achievable. They also should be measurable so that the company can monitor its progress and make corrections as needed.

Situation Analysis Once the firm has specified its objectives, it begins with its current situation to devise a strategic plan to reach those objectives. Changes in the external environment often present new opportunities and new ways to reach the objectives. An environmental scan is performed to identify the available opportunities. The firm also must know its own capabilities and limitations in order to select the opportunities that it can pursue with a higher probability of success. The situation analysis therefore involves an analysis of both the external and internal environment. The external environment has two aspects: the macro-environment that affects all firms and a micro-environment that affects only the firms in a particular industry. The macro-environmental analysis includes political, economic, social, and technological factors and sometimes is referred to as a PEST analysis. An important aspect of the micro-environmental analysis is the industry in which the firm operates or is considering operating. Michael Porter devised a five forces framework that is useful for industry analysis. Porter's 5 forces include barriers to entry, customers, suppliers, substitute products, and rivalry among competing firms.

The internal analysis considers the situation within the firm itself, such as:

Company culture Company image Organizational structure Key staff Access to natural resources Position on the experience curve Operational efficiency Operational capacity Brand awareness Market share Financial resources Exclusive contracts Patents and trade secrets

A situation analysis can generate a large amount of information, much of which is not particularly relevant to strategy formulation. To make the information more manageable, it sometimes is useful to categorize the internal factors of the firm as strengths and weaknesses, and the external environmental factors as opportunities and threats. Such an analysis often is referred to as a SWOT analysis.

Strategy Formulation Once a clear picture of the firm and its environment is in hand, specific strategic alternatives can be developed. While different firms have different alternatives depending on their situation, there also exist generic strategies that can be applied across a wide range of firms. Michael Porter identified cost leadership, differentiation, and focus as three generic strategies that may be considered when defining strategic alternatives. Porter advised against implementing a combination of these strategies for a given product; rather, he argued that only one of the generic strategy alternatives should be pursued. Implementation The strategy likely will be expressed in high-level conceptual terms and priorities. For effective implementation, it needs to be translated into more detailed policies that can be understood at the functional level of the organization. The expression of the strategy in terms of functional policies also serves to highlight any practical issues that might not have been visible at a higher level. The strategy should be translated into specific policies for functional areas such as:

Marketing Research and development

Procurement Production Human resources Information systems

In addition to developing functional policies, the implementation phase involves identifying the required resources and putting into place the necessary organizational changes. Control Once implemented, the results of the strategy need to be measured and evaluated, with changes made as required to keep the plan on track. Control systems should be developed and implemented to facilitate this monitoring. Standards of performance are set, the actual performance measured, and appropriate action taken to ensure success. Dynamic and Continuous Process The strategic management process is dynamic and continuous. A change in one component can necessitate a change in the entire strategy. As such, the process must be repeated frequently in order to adapt the strategy to environmental

changes. Throughout the process the firm may need to cycle back to a previous stage and make adjustments. Drawbacks of this Process The strategic planning process outlined above is only one approach to strategic management. It is best suited for stable environments. A drawback of this topdown approach is that it may not be responsive enough for rapidly changing competitive environments. In times of change, some of the more successful strategies emerge informally from lower levels of the organization, where managers are closer to customers on a day-to-day basis. Another drawback is that this strategic planning model assumes fairly accurate forecasting and does not take into account unexpected events. In an uncertain world, long-term forecasts cannot be relied upon with a high level of confidence. In this respect, many firms have turned to scenario planning as a tool for dealing with multiple contingencies. The hierarchy of Strategic intent: Strategic Intent Defined Strategic intent is a high-level statement of the means by which your organization will achieve its vision. It is a statement of design for creating a desirable future

(stated in present terms). Simply put, a strategic intent is your company's vision of what it wants to achieve in the long term. In complexity science's terms, strategic intent is decomposition of exploration rules into the next level of detail, the linkages to the exploration rules and the transition rules that define how it will migrate from its current design and ecosystem to a future business design and ecosystem.1 Purpose of Strategic Intent The logic, uniqueness and discovery that make your strategic intent come to life are vitally important for employees. They have to understand, believe and live according to it. Strategy should be a stretch exercise, not a fit exercise. Expression of strategic intent is to help individuals and organizations share the common intention to survive and continue or extend themselves through time and space. Strategies are involved in the formulation, implementation and evaluation of strategy. The hierarchy of strategic intent lays the foundation for strategic management process. The process of establishing the hierarchy of strategic intent is very complex. In this hierarchy, the vision, mission, business definition and objectives are established. Formulation of strategies is possible only when strategic intent is clearly set up. This step is mostly philosophical in nature. It will have long

term

impact

on

the

organization.

Vision is at the top in the hierarchy of strategic intent. It is what the firm would ultimately like to become.

Mission is the essential purpose of the organ ization, concerning particularly why it is in existence, the nature of the business it is in, and the customers it seeks to serve and satisfy." The mission statements stage the role that organization plays in society. Business definition explains the business of an organization in terms of customer needs, customer groups and alternative technologies.

Objectives refer to the ultimate end results which are to be accomplished by the overall plan over a specified period of time. The vision, mission and business definition determine the business philosophy to be adopted in the long run. The goals and objectives are set to achieve them. Strategic Intent - Hamel Prahalad

In 1989, an article called "Strategic Intent" by Gary Hamel and C.K. Prahalad created somewhat of an upheaval when it was published in the Harvard Business Review. Hamel and Prahalad argue that in order to achieve success, a company must reconcile its end to its means

through Strategic Intent.

In their book, "Competing for the future" (hamel and Prahalad define "strategic intent" as "an ambitious and compelling ... dream that energizes ... that provides the emotional and intellectual energy for the journey ... to the future." If strategic architecture (a high-level blueprint for the deployment of new functionalities, the acquisition of new competencies or the migration of existing competencies, and the reconfiguring of the interface with customers) is the brain, strategic intent is the heart. It should convey a sense of stretch current resources and capabilities are not sufficient for the task.

Hamel and Prahalad provided the following three attributes of strategic intent: direction, discovery, and destiny. 1. Sense of Direction. "Strategic intent (...) implies a particular point of view about the long-term market or competitive position that a firm hopes to build over the coming decade or so". It should be a view of the future conveying a unifying and personalizing sense of direction. 2. Sense of Discovery. A strategic intent is differentiated; it implies a competitively unique point of view about the future. It holds out to employees the promise of exploring new competitive territory. 3. Sense of Destiny. Strategic intent has an emotional edge to it; it is a goal that employees perceive as inherently worthwhile.

A typical Strategic Intent Process consists of three important steps: 1. Set the Strategic Intent (having all three characteristics stated above). 2. Set the Challenges: find appropriate challenges and communicate them to the entire workforce. These challenges are the means to get into the Strategic Intent. (For example: Suppose the Strategic Intent of Canon is: "Beat Xerox". A strategic challenge could be: Come up with a home copier at a target price of $1000) 3. 4. Empowerment of the Strategic Intent: key in any Strategic Intent process is to realize that getting into the Strategic Intent is a matter that involves everybody. The task of Top Management here is to "capture the wisdom of the anthill": to challenge the traditional downward communication style to an upward communication stream of new ideas coming from all the organization. The background of this approach to corporate strategy and strategic thinking in general was the dramatic post-war ascent of Japanese companies, in which the Japanese economy rose to dominate world markets by having initial ambitions that in the West would have been considered highly unrealistic with regards to their resources and capabilities, and in which an obsession to win was created and sustained at all levels of the organization, thus laying the groundwork for a 10- to 20-year quest for global leadership.

Unit - 2 Analyzing a companys external environment: A business does not function in a vacuum. It has to act and react to what happens outside the factory and office walls. These factors that happen outside the business are known as external factors or influences. These will affect the main internal functions of the business and possibly the objectives of the business and its strategies. Main Factors The main factor that affects most business is the degree of competition how fiercely other businesses compete with the products that another business makes. The other factors that can affect the business are:

Social how consumers, households and communities behave and their beliefs. For instance, changes in attitude towards health, or a greater number of pensioners in a population.

Legal the way in which legislation in society affects the business. E.g. changes in employment laws on working hours.

Economic how the economy affects a business in terms of taxation,

government spending, general demand, interest rates, exchange rates and European and global economic factors.

Political how changes in government policy might affect the business e.g. a decision to subsidise building new houses in an area could be good for a local brick works.

Technological how the rapid pace of change in production processes and product innovation affect a business.

Ethical what is regarded as morally right or wrong for a business to do. For instance should it trade with countries which have a poor record on human rights.

Changing External Environment Markets are changing all the time. It does depend on the type of product the business produces, however a business needs to react or lose customers. Some of the main reasons why markets change rapidly:

Customers develop new needs and wants. New competitors enter a market. New technologies mean that new products can be made. A world or countrywide event happens e.g. Gulf War or foot and mouth

disease.

Government introduces new legislation e.g. increases minimum wage.

Business and Competition Though a business does not want competition from other businesses, inevitably most will face a degree of competition. The amount and type of competition depends on the market the business operates in:

Many small rival businesses e.g. a shopping mall or city centre arcade close rivalry.

A few large rival firms e.g. washing powder or Coke and Pepsi. A rapidly changing market e.g. where the technology is being developed very quickly the mobile phone market.

A business could react to an increase in competition (e.g. a launch of rival product) in the following ways:

Cut prices (but can reduce profits) Improve quality (but increases costs) Spend more on promotion (e.g. do more advertising, increase brand loyalty; but costs money)

Cut costs, e.g. use cheaper materials, make some workers redundant

Social Environment and Responsibility Social change is when the people in the community adjust their attitudes to way they live. Businesses will need to adjust their products to meet these changes, e.g. taking sugar out of childrens drinks, because parents feel their children are having too much sugar in their diets. The business also needs to be aware of their social responsibilities. These are the way they act towards the different parts of society that they come into contact with. Legislation covers a number of the areas of responsibility that a business has with its customers, employees and other businesses. It is also important to consider the effects a business can have on the local community. These are known as the social benefits and social costs. A social benefit is where a business action leads to benefits above and beyond the direct benefits to the business and/or customer. For example, the building of an attractive new factory provides employment opportunities to the local community. A social cost is where the action has the reverse effect there are costs imposed on the rest of society, for instance pollution.

These extra benefits and costs are distinguished from the private benefits and costs directly attributable to the business. These extra cost and benefits are known as externalities external costs and benefits. Governments encourage social benefits through the use of subsidies and grants (e.g. regional assistance for undeveloped areas). They also discourage social costs with fines, taxes and legislation. Pressure groups will also discourage social costs. Analyze the companys external environment and identify opportunities and threats it faces. List the opportunities and threats the company faces in two columns just as you listed strengths and weaknesses in two columns. Once weve studied the industry life-cycle model and the Porter 5-forces model in Chapter 3, try using them to analyze the situation your company faces. If you think of additional strengths and weaknesses as you are listing opportunities and threats, add them to the lists you created in Step 2. Here is a list of opportunities and threats developed from the Sun Microsystems case. Note that this list, based on the case published in 2001, shows more threats than opportunities. The threats shown here played a significant role in the serious problems that Sun experienced in 2001 and 2002.

Opportunities

Threats

Sales of networking equipment for Many competitors can make Unix web, other large-scale applications servers are growing Digital contents creation business is growing Microsoft Windows NT can in theory do everything Solaris does and offer much wider compatibility Linux offers strong competition for Solaris and is more open

Industry analysis: Definition: A market assessment tool designed to provide a business with an idea of the complexity of a particular industry. Industry analysis involves reviewing the economic, political and market factors that influence the way the industry develops. Major factors can include the power wielded by suppliers and buyers,

the condition of competitors, and the likelihood of new market entrants. Industry Analysis

The course is based on the ability of students to define their business, conduct an effective industry analysis, and identify the "key success factory" for firms competing in the industry. Such industry analysis is based on: A. DEFINE THE BUSINESS. The boundary for industry analysis is the markets and products that describe the domain of the industry. Once you understand the business segment that is to be analyzed, identify the capabilities required to participate in that industry, and those competitors that are able to effectively target the same business segments. These four elements set the parameters for understanding and analyzing the industry. As industries like printers, copiers, scanners, and facsimile machines converge, business definitions become more difficult. In industries like computers, consumers are becoming more demanding for customized products and services. B. DESCRIBE THE INDUSTRY STRUCTURE. For each product-market segment, an industry analysis will describe the "five-forces" of competition. 1. A primary force comes customer segments that make up the markets. The size and importance of customers provide the power to negotiate prices and deals that reduce the profitability of the industry. The size and growth of segments determine their potential influence on product development and level of competition.

2. A second force comes from the competitors and their strategies for gaining market share. Each competitor offers a set of products and services that attempts to provide higher value to the product-market segments they address. Strategies can be to provide some combination of higher performance, more fashion and features, higher quality, or lower price. Increased rivalry often leads to price or service competition that can reduce the profitability of the business. 3. A third force comes from the industry suppliers. Industry suppliers often control critical inputs that can affect a firms ability to compete. Access to critical equipment, materials, or components can determine what firms will lead the industry. For this reason, increased outsourcing often leads to lower entry barriers for new competition. 4. The fourth force represents the barriers to change in industry structure, either from new competitorsentering the industry or current competitors existing the industry. Barriers to entry often include heavy investment in capital, equipment, and market development. Barriers to exit often include outstanding warranty or service contracts that must be honored, and alternative use or potential sale of equipment and facilities. Once specialized facilities are established, they are seldom shut down, but are often sold to another industry participant.

5. The fifth force represents the potential for change in product-market structure of the industry through thesubstitution of products or services with alternative approaches to satisfying the customer's needs. This requires the identification of potential substitutes and the characteristics that would cause rapid substitution. Price often becomes a driver for substitutes, such as plastics for metals in cars and plumbing supplies. Today, the Internet is becoming a substitute for mail service and, eventually, telephone service. C. IDENTIFY KEY SUCCESS FACTORS. The primary purpose of industry analysis is to identify the requirements and trends that determine the key success factors for the business. These factors encompass (1) customer requirements, (2) competitive factors that must be met, (3) regulations/industry standards in the business, (4) the resource requirements to implement competitive strategy, and other (5) technical requirements to build a competitive position. 1. Customers are looking for products that provide some level of value for the price they pay. Each buyer segment has different requirements that affect its key success factors. Requirements can include high performance, durability, special features or fashion, ease of use, or rapid availability. 2. Competing firms often use similar product-market strategies. Competition is often based on price, quality, and delivery. Depending on their strategic

focus, each firm must develop a set of skills (strategic weapons) that allow it to perform better than their competitors on each competitive dimension. 3. Industry regulations or standards are often minimum requirements for participation in a competitive arena. Goverment regulations often affect safety issues for the environment or end users. Industry standards often determine technical compatibility, process performance, and interface issues for network or system products. Industry standards can be set by a special body, like the Industry Standards Organization (ISO), or become ad hoc standards set by leading competitiors, like Intel and Microsoft. 4. Resource requirements are be coming increasingly critical as markets become global and economies of scale become critical for research and development, manufacturing, and marketing. Investments now excede $1 billion for facilities in semiconductors, paper making, and steel production. In high technology areas, like information technology, shortages of qualified personnel are forcing firms to outsource much of their capabilities. 5. Technical requirements are also key to today's competitive environment. Without access to, or internal technology, firms are not able to participate in many industries. This is especially important for suppliers, such as component suppliers for electronics or automobiles. As firms reduce

their number of suppliers, suppliers must increasingly add research and development capabilities to stay in the game. Business Strategies Analysis Competitive product-market strategies are critical to business success. Business strategy analysis requires the following: A. IDENTIFY STRATEGIC GOALS. A firm's strategic goals drive business strategy and address the key success factors of the industry. Strategic goals often include the vision or mission statement for the business. They should also set the direction and standard for financial and market results against which actual performance can be measured. The two most common stategic goals are: 1. Competitive and market goals that define market share or market growth and penetration for the firm's products or services. 2. Financial performance in terms of key ratios, like return on investment and sales, and growth in revenues and/or profitability. B. DEFINE BUSINESS STRATEGY. The definition of business strategy includes six areas of analysis. The product-market focus is the first step. The underlying capabilities in implementing a product-market strategy include the technologies, processes and market access that a firm has. These address the

business and its key success factors. Businesss strategy includes customer targeting, product lines and positions, technical capabilities, strategic processes, and market access. 1. Describe the customer targeting strategy and its requirements. Without targeting a specific customer segment, it is impossible to develop effective products or services that meet specific customer needs and requirements. Each segment, by definition, has a different set of requirements. While differences may be minor at time, they affect the decision of the customer to purchase the product or service. 2. Describe the product line and product positioning strategies for the market segment. The business unit must decide what it will offer and how those offerings will be positioned within the competitive environment. A firm can have one product or a product line that covers a range of prices with a variety of features. The price-quality-performance position is a relative determination compared with competitors' prices, quality levels and features when comparing your products with alternative products in the marketplace. 3. Identify the technologies required to implement the product-market strategy. Technologies provide the basic capabilities needed to develop products or services, as well as the associated processes used in developing or delivering them to the marketplace. Technology determines the range of

products and speed with which they can be developed and delivered to the marketplace. 4. Identify the strategic process(es) required to implement the productmarket strategy. The core capabilities of a firm are embedded in the business processes and functions. Strategic processes can either improve the product or marketing capabilities of a firm. These processes and functions are the basis of a firms competitive strengths and weaknesses, and make up the core competencies of the firm. These skills and capabilites are described in section C below. 5. Identify the market access strategy. The final element of strategy requires that a firm have access to its market or customers. Today, the Internet is considered the new channel for accessing markets. In the 1960s, 1-800 numbers were the new method of access. At the same time, discount superstores grew their market share in retail walk-in sales markets. C. IDENTIFY INTERNAL CAPABILITIES AND SKILLS. The ability of a firm to implement its strategy is dependent upon both the functions and business processes that supports its strategy. Depending on the nature of the organization, its functions and business process capabilities and skills are central to strategy implementation. These capabilities can be classified into product or service creation functions and processes, and product or service delivery and satisfaction

functions and processes. Product-related functions and processes are dependent upon a firm's R&D and manufacturing/purchasing capabilities. 1. The R&D function generates proprietary technologies that can be applied to the development and production of new products. In the electronics industry, access to basic components, like hard disk drives and floppy disk drives and high precision production equipment are fundamental to making smaller, lighter, higher quality products. Each generation of smaller products, like palm corders, stimulates market growth for the company that is first to the market. Each generation of smaller products also reduce packaging and shipping costs, reduce power consumption, extend battery life, and are more convenient to carry. 2. The time-to-market process is required to integrate new technology into a firm's products and services. Today, competitive advantage is often related to the speed with which a firm can introduce the next generation of technologies into the market through new product and process developments. Once the product is developed, production capacity often becomes the limiting factor of market growth. 3. The manufacturing function transforms a set of purchased components and

software into a firm's products. Having acceptable products available in a timely manner for customers is central to making sales. The ability to provide the highest quality products in the most efficient allows companies to gain market share by offering competitive prices and ready availability. Experience curve effects from high volumes can lead to lower costs. 4. The integrated-supply-chain process coordinates purchasing of components for assembly, product outsourcing, otherwise making sure products are available to meet customer order requirements. Outsourcing and alliances increase a firm's ability to offer a wider range of products or to introduce new products more rapidly. Increased flexibility provides competitive advantage in responding to rapid market changes. Market-related functions and processes are directed at serving the customer in the most effective manner possible. Distribution and marketing activities, including sales and service, are central to fulfilling customer demands and ensuring customer satisfaction. 1. The distribution function is essential for a firm in gaining market access. The company that dominates the sales channels for a given market often controls the market. Market share is related to product availability, i.e. the number and type of locations that make the products and services available

to your customer target. The Internet is providing the next generation of distribution and marketing system. 2. The market-to-collection process is used to obtain customers and deliver products. The Internet is changing the role of sales from face-to-face communication to phone or computer communications. It is expected that many intermediary roles (such as distributors and agents) will change to that of infomediary. As product quality and durability improve, service becomes less important, and new channels can be developed. 3. The marketing function provides the customer with information and education about a firm's products and services. Product information and education is often needed to let customers know about product capabilities. Advertising is the part of marketing that helps pull the customer into the market-to-colletion process by creating recognition and image for the brand's products and services. It helps pull the customer into the store and create brand image. Coca Cola, with the largest advertising budget, spends less money per bottle of soft drink sales than any other competitor. That gives them competitive advantage. 4. The customer-service and satisfaction process is critical to sustain a company's brand loyalty. It is much less expensive to keep an existing customer than to acquire a new customer. Once a customer relationship is

established, it is important that appropriate customer service activities are established to maintain the relationship, and solve problems that might hurt the relationship. When after sales service is required, customers need a company contact. 1-800 numbers and the Internet are rapidly providing direct purchase opportunities and technical support capabilities. Dell Computers, for example, guarantees 48 hour repairs of their products (often next day service). Xerox provides 7-day, 24-hour repair service to their large system customers. D. STRATEGIC PERFORMANCE. Performance is an outcome of strategy. The success with which a firm's business strategy effectively addresses its industry's key success factors will determine its strategic performance. Strategic performance is measured in terms of both financial and market success. 1. Financial performance is essential for continued business operations. Financial capabilities are critical in supporting functional strategies and making required infrastructure investments. For example, a company with adequate funding can expand or invest, or can provide customer financing. 2. Market share demonstrates a firm's ability to create and hold customers, which determines the long term success of a firm. The freshness of product

lines and market positioning affect a firm's ability to attract customers ahead of their competition. Porters dominant economic features: