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Study Pattern
MODULE SESSION TOPICS CONTENTS
Introduction to Strategy
II
2 3,4 4 5
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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MODULE - II
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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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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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Marketing Strategy
Finance Strategy
HR Strategy
Operations Strategy
Manufacturing Strategy
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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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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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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
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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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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
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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Senior Management
Project Teams
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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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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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Strategic Target
Industry Wide
Differentiation
FOCUS
Strategic Advantage
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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
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Generic Strategy
Differentiation
Product Engineering
Creative Flair Strong Capability in Basic Research Corporate Reputation for Quality or Technological Leadership
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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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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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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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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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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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