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Meghnathrao V Belathur

Study Pattern
MODULE SESSION TOPICS CONTENTS

Introduction to Strategy

Definition Importance of Strategy in Business


Stages of Strategy Process Types of Strategy

II

2 3,4 4 5

Structural Analysis of Industry

Porters Five Forces Theory Industry Attractiveness Sector, Segment & Industry McKinseys 7-S Framework

Text Books: Exploring Corporate Strategy, Prentice Hall India (Gerry Johnson & Kevan Scholes) Cases in Strategic Management, AIPD, Charles Hill & Gareth Jones Test @ the End of Module II
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MODULE - I

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Introduction to Strategy
There are many theories and experts in the field of Strategy who have provided different definitions, however the essence of Strategy is How well an Org or group is prepared and the theory of how to compete successfully. Strategic management is defined as "consisting of the analysis, decisions, and actions an organization undertakes to create and sustain competitive advantages." Michael Porters definition: Strategy is about achieving competitive advantage through being different.

The issue of how and why some firms outperform others in the marketplace is central to the study of strategic management.
Strategic management has four key attributes: a) It is directed at overall organizational goals, b) Includes multiple stakeholders, c) Incorporates both short-term and long-term perspectives, and d) Incorporates trade-offs between efficiency and effectiveness.

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Introduction to Strategy
The first step in analyzing the business level strategy of a firm is to look at its long term economic profitability. As one can very clearly state or understand that if an organization/firm is profitable it can continue to do what its working on and leverage its working to carry out any of the minor changes to the business to improve further.

There are three core activities in the strategic management process viz. i. Strategy analysis, ii. Strategy formulation, and iii. Strategy implementation These activities are highly interrelated to and interdependent on one another. There are five key stakeholders in all organizations: i. Owners, ii. Customers, iii. Suppliers, iv. Employees, and v. Society at large. Successful firms go beyond an overriding focus on satisfying solely the interests of owners. There is a need for consistency between a firms vision, mission, and strategic objectives.

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Importance of Strategy
Strategic leadership is vital in ensuring that strategies are formulated and implemented in an effective manner. Leaders play a central role in performing three critical and interdependent activities: Setting the direction, Designing the organization, and Nurturing a culture committed to excellence and ethical behavior. Successful organizations must ensure that they have the proper type of organizational structure. Furthermore, they must ensure that their firms incorporate the necessary integration and processes so that the internal and external boundaries of their firms are flexible and permeable. Although most organizations remain small or die, some firms continue to grow in terms of revenues, vertical integration, and diversity of products and services. In addition, their geographical scope may increase to include international operations. After a firm expands into related products and services, its structure changes from a functional to a divisional form of organization. Finally, when the firm enters international markets, its structure again changes to accommodate contd the change in strategy.

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Strategy Generic Types


Strategy for any business is defined at 3 or 4 levels viz. Corporate, Business, Functional and Enterprise. This is defined by the Mission Statement that the Business Head of the firm makes based on which direction is the Business headed to. Business Strategy -> Firms follow one of the 3 Generic strategies to be profitable: Overall Cost Leadership, Overall Differentiation and Focus. This will always be in tune with the Corporate / Enterprise Strategy (Mission Statement).

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MODULE - II

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Leadership Vision & Mission


Vision:
Importance Defines the leaderships thought process on where the Org needs to look towards. There however will be some vagueness, which gets clarified by the Mission Statement & the following Strategy adapted by the business.

Mission:
Importance Defines the overall purpose of why the Org exists or the need for the Org to exist in the market. The mission statement provides a sense of direction for Strategy formulation at the business level.

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Leadership Vision & Mission (Example)

Vision
To emerge as a Best Practices Bank by pursuing global benchmarks in profitability, operational efficiency, asset quality, risk management and expanding the global reach.

Mission
To provide quality banking services with enhanced customer orientation, higher value creation for stakeholders and to continue as a responsive corporate social citizen by effectively blending commercial pursuits with social banking.

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Leadership Styles
There are different styles of Leadership, which impacts the growth and structure of any firm / Organization:

Leadership styles:
Autocratic Bureaucratic Democratic Laissez-Faire Additional styles that have newly been discussed: Transformational Leadership Transactional Leadership Corrective Leadership Change Leadership Intelligence Leadership Multicultural Leadership Pedagogical Leadership Servant Leadership Bridging Leadership Purposeful Leadership

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Hierarchy (Level) of Strategy


Corporate Level Strategy

Business Level Strategy

Business Level Strategy

Marketing Strategy

Finance Strategy

HR Strategy

Operations Strategy

Manufacturing Strategy

Functional Level Strategy

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Michael. E. Porters Five Forces

Threat of New Entrants

Bargaining Power of Suppliers

Jockeying amongst current contestants /competitors

Bargaining Power of Customers

Threat of New Substitutes

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Michael. E. Porters Five Forces

Threat of New Entrants: Economies of Scale Product Differentiation Capital Requirement Cost Disadvantage Access to Distribution Channels Government Policies

Bargaining power of Suppliers Supplier Concentration No. of Buyers Switching Costs Forward Integration

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Michael. E. Porters Five Forces

Bargaining Power of Customers Buyer Concentration Number of Suppliers Switching Costs Substitute Issues Backward Integration Threat of Substitutes (Products / Services) Functional Similarity Price and/or Performance Product composition

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Michael. E. Porters Five Forces

Jockeying for position amongst current competitors No. of Existing Players with similar product lines (Competition) Current Growth vs Growth potential in future Switching costs (Re-assessing the Product / Service Strategy) Cost of re-positioning in the Industry Exit Barriers

Government Policies 6th Force??

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Industry Attractiveness
A firms theory of being successfully either emerges as a result of different strategies and/or approaches has by far and large been addressed by 1. The Strength of the Firm (Build, Enhance) 2. The Weaknesses that it exhibits (Resolve, Reduce/Minimize) 3. The Opportunities that exists in the Industry/Environment (Exploit, Expand) 4. The Threats (Perceived & those that continue to exist) (Avoid, Thwart / Overcome) The firms evaluate their theories on how to gain competitive advantage relative to their Strengths, Weaknesses, Opportunities & Threats. Based on the SWOT analysis, Financial Data Analysis and the level of the Opportunities existing and the Threats envisaged Industry Attractiveness for any firm is decided. There are different tools to determine the Industry attractiveness based on the Porters 5 forces and the SWOT analysis.
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Steel Industry Attractiveness


Steel Industry in India: 4th Largest Steel Producing nation after China, Japan, and USA. Expected production capacity of crude steel 110 Mn Tons Around 20 companies, ISPs (Integrated Steel Plant) - 4 companies viz. SAIL, TISCO, Rashtriya Ispat Nigam Ltd., (RINL), and Vizag Steel (VSP) Primary Producers Others SAIL Largest ISP with over 10 Mn tpa of salable steel spread over 4 plants. TISCO Second with over 3.2 Mn tpa Indian companies Cost Advantage due to domestic availability of raw materials (Iron ore available in abundance), cheap labor. Challenges: Costs on Capital Equipment, Power and Inefficiencies (low employee productivity & lack of skilled labor) erodes the edge that it could have garnered.

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Steel Industry Attractiveness


Coking Coal & Iron Ore Main raw materials, Coking coal import increased by 39%. Impact of Government Policies: Delay in allocating captive Iron ore mines & licensing. Dumping of cheap imports due to reduction of Import duties on Steel due to WTO treaty. Low export pricing, ensured that the Iron ore was exported mostly into China (due to high Chinese demand)

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Organization Structures - Types


Organization Structures
Functional

Head of the Org

Function 1

Function 2

Function 3

Function 4

Function 5

Advantages
Functional expertise helps perform tasks with high level of speed and efficiency. Individuals highly specialized in their fields/functions.

Limitations
Inter-Team work culture non-existent. Each team assumes territorial boundaries. Any decision by Top Management perceived as biased. Co-ordinating work is a big challenge.

Eg.: Young organizations planning for high growth. Orgs/Firms choosing Efficiency as its mantra normally works in the Functional structure. Functions viz. Engineering, Accounts, Purchasing, Warehouse etc. contd

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Organization Structures - Types


Head of the Org

Organization Structures
Hierarchical / Divisional
Group 1 Group 2

Function

Sub Group 1

Sub Group 2

Sub Group 3

Advantages
Hierarchical organizational structure is common in private and public sector organizations, both large and small. Hierarchical structure can coordinate the actions of thousands of employees with clock work precision. Hierarchical organizations are highly process oriented.

Limitations
Hierarchical structures are often inflexible. Hierarchies work for standardized processes but they are not useful in dynamic environments. Slow to react to new opportunities, which often require transformative change. Decision-making is usually slower in hierarchical structures because responsibility and authority are concentrated in a few people at the top. Hierarchical systems can stifle creativity and innovation.

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Organization Structures - Types


Organization Structures
Matrix (Projectized)

Senior Management

Functional / Skill Based Group

Project Teams

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Organization Structures - Types


Organization Structures Matrix (Projectized) Functional: Knowledge about where and how the product or service would be used Who would be the likely user communities What would be the likely process flow Skills: Expertise and Knowledge about the tools, Knowledge about the other dependencies and limitations of the tool. Knowledge about expected issues on the developed product / service.

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McKinseys 7-S Framework


McKinseys 7S Framework
The model is most often used as a tool to assess and monitor changes in the internal situation of an organization.
STRATEGY

SKILLS Super Ordinate Goals (Shared Values)

STRUCTURE

Soft Elements

Style

SYSTEMS

STAFF

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McKinseys 7S Framework
McKinsey 7S framework was developed in the early 1980s by Tom Peters and Robert Waterman, two consultants working at the McKinsey & Company consulting firm. The basic premise of the model is that there are seven internal aspects of an organization that need to be aligned if org/firm needs to be successful. The 7S model can be used in a wide variety of situations where an alignment perspective is useful, for example to help: 1. Improve the performance of a company. 2. Examine the likely effects of future changes within a company. 3. Align departments and processes during a merger or acquisition. 4. Determine how best to implement a proposed strategy.

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McKinseys 7S Framework
Hard Elements: Strategy: The plan devised to maintain and build competitive advantage over the competition. Structure: The way the organization is structured and who reports to whom. Systems: The daily activities and procedures that staff members engage in to get the job done. Soft Elements: Shared Values: These are the "superordinate goals, defining the core values of the company that are imbibed in the corporate culture and the general work ethics. Style: The Leadership style adopted & practiced. Staff: The employees and their general capabilities. Skills: The actual skills and competencies of the employees working for the company.

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Business Strategy Wipro Ltd.,


Wipro Ltd.,

Vision : Applying Thought Mission: For a Better Tomorrow A Market Cap of INR 1.2 Bn (USD 26 Bn), Revenues of INR 310 Mn and An Employee base of approx. 120K.

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Business Strategy Wipro Ltd.,


Wipro Ltd.,

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Business Strategy Wipro Ltd.,


Wipro Ltd.,

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Business Strategy Wipro Ltd.,


Wipro Ltd.,

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Business Strategy Wipro Ltd.,


Wipro Ltd.,

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Financial Status - Wipro Ltd.,


Wipro Ltd.,

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Business Level Strategies


Corporate Level Strategy takes decisions related to New Ventures, Mergers & Acquisitions, Diversifications, JVs, Divestment, Restructuring etc., Business Level Strategies relates to one business of a multi-business firm or to the only business of a single business firm. The 3 Generic Strategies viz. Overall Cost Leadership, Overall Differentiation and Focus was devised following Porters (1980) classification of business level strategies. Initially the Corporate level Strategies were based on the assumption was that the firms with large market share were more profitable. Porter found that many firms which had large market share and those which had very small market shares were profitable. Further analysis showed that these firms followed one of the 3 generic strategies. The firms with medium market share were not so profitable as these firms were found not following any of these strategies successfully. To determine a firms profitability, it was also important to perform Financial analysis using the financial ratios.

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Business Level Strategies


Overall Cost Leadership Overall Differentiation Focus

Generic Competitive Strategies

Uniqueness Perceived by Customer

Low Cost Position

Strategic Target

Industry Wide

Differentiation

Overall Cost Leadership

Particular Segment Only

FOCUS

Strategic Advantage

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Business Level Strategies

Generic Competitive Strategies

The 3 Generic Strategies imply differing organizational arrangements, control procedures and inventive systems. As a result, sustained commitment to one of the strategies as the primary target is usually necessary to achieve success. Some of the common implications of the generic strategies in these areas are as follows: Generic Strategy Commonly Required Skills & Resources
Sustained capital investment and access to capital

Common Organizational Requirements


Tight cost control

Overall Cost Leadership

Process Engineering Skills


Intense Supervision of Labor Products designed for ease in manufacture Low-cost distribution system (High Degree of Automation)

Frequent, detailed control reports


Structured Organization and responsibilities Incentives based on meeting strict quantitative targets

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Business Level Strategies

Generic Competitive Strategies

Generic Strategy
Differentiation

Commonly Required Skills & Resources


Strong Marketing Abilities

Common Organizational Requirements


Strong Co-ordination amongst functions in R&D, Product Development, and Marketing Subjective Measurement and incentives instead of Quantitative Measures Amenities to Attract Highly Skilled labor, and/or Creative personnels Incentives based on meeting strict quantitative targets

Product Engineering

Creative Flair Strong Capability in Basic Research Corporate Reputation for Quality or Technological Leadership

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Business Level Strategies


Generic Strategy
Differentiation

Generic Competitive Strategies


Common Organizational Requirements

Commonly Required Skills & Resources


Long tradition in Industry or Unique combination of skills drawn from other businesses Strong co-operation from channels

Focus

Combination of the above policies (mentioned in Differentiation) directed at a particular strategic target

The Generic strategies may also require different styles of Leadership and can translate into very different corporate cultures and environments attracting a varied group into the organization. If any firm fails to develop a strategy in any one of the three directions, the firm gets stuck in the middle and ends up losing market, & capital.

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Analyzing Aston Martin


Defining Heritage History with no future is just history. History with a future represents heritage - Founded in 1913 by Robert Bamford and Lionel Martin as 'Bamford & Martin Ltd', the company has developed into an iconic brand synonymous with luxury and elegance. 1914 saw the birth of the name Aston Martin following one of Lionel Martin's successful runs at the Aston Hill Climb in Buckinghamshire, England. Within a year the first Aston Martin had been built and registered with the name and by 1920 the business had relocated to Kensington

Aston Martins rich and evocative history has been and still is brought to life by a succession of outstanding sports cars. From initial concept to final production, from hand craftsmanship to high-tech computer simulation, uniqueness is inherent - as it is with our customers. It is the harmony of apparent contradictions that makes Aston Martin so unique. This concept assures exclusive luxury and comfort combined with racing performance - a truly outstanding experience. Aston Martins are hand manufactured by highly-skilled engineers, which guarantees the utmost attention to detail and precision across all products.

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Analyzing Aston Martin

Aston Martin's plans for growth are more ambitious than ever. With a diverse and highly nuanced model range the company is continuing its global expansion plans. After entering Poland, Croatia, Czech Republic and Taiwan in recent years, attention is focusing on achieving growth in the emerging markets of China, India and the Middle East. All current and future activities are based on a dedicated environmental policy. The passion that surrounds Aston Martin combines with an inherent bond between engineering and design ensuring tomorrows Aston Martin cars will honour the companys heritage whilst continuing to push new boundaries. Products Range: Virage, Cygnet, One-77, V12 Vantage, Rapide, DBS, V8 Vantage, DB9, Vanquish, DB7, V8, Vantage, Heritage

Competitors: 1. Alfa Romeo 2. Ferarri 3. Lamborghini 4. Maserati GranTurismo 5. Porsche 911 6. Bugatti Suppliers: Bang & Olufsen - commitment to manufacturing skills and design values, each has grown into an iconic global brand, bringing together technological and design excellence with the strongest possible emotional appeal.

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Analyzing Aston Martin

Financial Info: Revenues: Increased by 36.3% to 474.3m Operating profits: increased by 46% to 35.3m, Net profits: Nearly doubled to 7.6m. EBITDA: Increased by 40% to 80m Net assets: 333m The company, which has been majority-owned by the Kuwaiti fund Investment Dar since its 503m spin-off from Ford in 2007, is also working on plans to raise finance to underpin future growth, particularly in emerging markets. Focus on emerging markets: Ukraine, Turkey, Chile, Brazil and, most recently, India. It has also opened in small markets such as Sweden, Poland, Croatia and Greece. It has four dealerships in China and the company said it plans to open three or four more dealerships.

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Strategy Analysis - Methods


SWOT Analysis
SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis is the cornerstone to decide on the approach & Strategy to be implemented. This cannot be a one time affair as the environmental factors and the competition ensures that one needs to carry out this exercise on a regular basis. Internal Assessment: Strengths and Weakness External Assessment: Threats and Opportunities

Financial Data Analysis

Financial Data Analysis of the Financial statements and reviewing the financial capabilities of a firm gives greater objectivity to SWOT Analysis. Different functional strategies do influence the financial performance of a firm. It is therefore very important to have a good financial strategy, which can improve the firms value.

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Financial Analysis
ROE vs ROI ROI -> Need to compare with Avg. Cost of Capital Avg. Cost of Capital = Weighted Avg. Cost of Equity & Debt Capital This does not confirm that a firm which shows accounting profits is economically profitable if the long term ROE is less than ke. ROE -> Should always be greater than Cost of Equity Capital (ke) for a firm to be profitable. Analysis using Du Pont Ratios ROE = (R/S) x (S/A) x (A/E) R/S = Firms Margin (Net Profit / Sales) [Defines Business Level Strategy] S/A = Asset Turnover Ratio (Sales / Avg. Total Assets) [Defines Technical Strategy] A/E = Financial Leverage (Avg. Total Assets / Equity) [Defines Financial Strategy]

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Financial Analysis
Capital Asset Pricing Model (CAPM) ke = rf + B (rm rf) rf = Risk Free Return rm = Return on the Market Portfolio B = Beta of the firm [A frequently used measure of risk of a company (Ehrhardt (1994), Arumugam (1999)] Normally an ROE of a company for 5 or more years should be monitored to assess a firms profitability. Measuring Profitability ROA, ROS, EPS, P/E, Market to Book Value etc.

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Financial Analysis
Analyzing Stock Prices:
Company Asian Paints KNPL Berger Paints Share Value 3696.35 903.15 134.95 Book Value 259.36 197.28 24.40 P/E 36.08 22.33 25.32 Market Cap 35,455.31 4,867.25 4,671.49

Industry P/E: 31.33 Price per Earning ratio (P/E) (current market price/share) / (after tax earnings / share) A measure of anticipated firm performance high P/E indicates stock mkt anticipates strong future performance Implementing Strategy Calculate CAGR (Compounded Annual Growth Rate) CAGR = (Ending Year / Beginning Year)^(1/No. of Years) - 1

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Module Evaluation
Test MCQs + Short answers (25 Marks) Case Study Chose Industry, Analysis using Porters 5 Forces, Perform SWOT Analysis & Financial Analysis, Provide your observations on Growth Sustainability Competition What needs to be changed to make the firm profitable

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