STRATEGIC MANAGEMENT

COURSE MATERIAL (CM) 1. Peter Fitzroy et al, Strategic Management the Challenge of Creating Value; Routledge, Francis and Taylor Group

EVALUATION SCHEME
EXAMINATION & QUIZZES (50 Marks): -- End term Examination ----- 30 marks -- Three Quizzes ----- 20 marks INTERNAL ASSESSMENT (50 MARKS): -- Attendance & Participation ----- 10 marks -- Class Presentations & Discussions 20 marks -- Projects-Presentations & Written ----- 20 marks Submissions

STRATEGY

WHAT IS STRATEGY? Derived from Greek 'Strategia', which connotes Generals art & science of planning & conducting war. Strategy is a unified, comprehensive & integrated plan of the enterprise to meet challenges of the environment; and designed for achievement of its objectives, through proper implementation process (& use of Strat. Advs.).

STRATEGY-DEFINITIONS
Strategy can be defined as a long-term blueprint and game plan of an organisation's desired direction & destination - of what it wants to be, what it wants to do & where it wants to go. Strategy is a higher level unified, comprehensive and integrated plan of courses of actions, which is of vital importance to the organisation as a whole. It may be aimed at maintaining or improving its position in the competitive

DEFINITIONS (contd.)
Johnson et. al. Strategy is the direction & scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations. Thompson & Strickland - A company's strategy consists of the combination of competitive moves and business approaches that managers employ to please customers, compete successfully, and achieve

IMPORTANCE OF STRATEGY
Strategy means making clear-cut choices about how to compete Jack Welch (ex CEO GE) Strategy is a commitment to undertake one set of actions rather than another Sharon Oster (Prof., Yale Univ.) Without a strategy the organization is like a ship without a rudder- Joel Ross & M. Kami Important for attaining / maintaining competitive business or market advantage of the organisation, in a dynamic, uncertain & changing environment.

IMPORTANCE OF STRATEGY
Strategy means making clear-cut choices about how to compete Jack Welch (ex CEO GE) Strategy is a commitment to undertake one set of actions rather than another Sharon Oster (Prof., Yale Univ.) Without a strategy the organization is like a ship without a rudder- Joel Ross & M. Kami Important for attaining / maintaining competitive business or market advantage of the organisation, in a dynamic, uncertain & changing environment.

WHAT MAKES THE STRATEGY A WINNER

How well it fits the company's situation well matched to external environment, industry, competition, market opportunities etc. and internal situation of strengths, weaknesses, competencies, competitive capabilities. How well it is helping company achieve sustainable competitive advantage the bigger and more durable competitive edge, the better is the strategy. Resulting in better company performance gain in profitability & financial strength, and gain in competitive strength & market standing.

STRATEGIC MANAGEMENT
Strategic Management is first & foremost about creating organisations, that create value. In the world with complex interactions & uncertainty, value creation requires continuous innovation. Twofold demand of value creation excellent execution of current activities, and developing capabilities for tomorrow. Strategic Management involves leadership skills, intuitive judgement, intellect, analysis and planning. The organisations, their people asset, & competitive environment of organisation, matter.

Characteristics of Strategic Management

Creating the Organisation that both responds to and introduces change. Involves designing organisational structure, systems, processes, culture, values, developing people leadership, integrity, vision, creativity, risk taking etc. Creating & Managing Change must change as fast or faster than environment (turbulence, uncertainty), proactivity. Creating Value organisations are economic entities & must generate value; higher revenue than the costs, continually and not just in the present. Ethics personal values, integrity, fairness, transparency, greater sharing of information within organisation, rational remunerations of CEOs.

STRATEGIC MANAGEMENT

The challenge of Strategic Management is to be able to understand complex issues facing organisations and develop the capability for long-term organisational success. Johnson et. al. Strategic Management is the managerial process of creating organisations that generate value in a turbulent world over an extended period of time. Peter Fitzroy et. al. Three components of Strategic Management Process; -- Strategy Formulation -- Strategic Decision -- Strategic Implementation

STRATEGIC MANAGEMENT PROCESS

Strategic Management Process the three components: 1. Strategy Formulation - Understanding strategic position of the organisation, which includes; a) The Environment political, social, economic, technological, environmental, & legal, giving rise to Opportunities & Threats; b) Strategic Capability made up of its resources & competences, resulting in strengths & weaknesses of an organisation; and c) Expectations from & purpose of the organisation influenced by CEOs vision, corporate governance, ethics, values, organisations culture and stake holders. Contd.

STRATEGIC MANAGEMENT PROCESS (contd.)

2. Strategic choices/decisions for the future the

choices in terms of how the organisation may seek to compete both at the corporate and business unit levels, based on own competitive advantages; & study of markets, customers & strategic capabilities. 3. Turning strategy into action - implementation: a) Structuring the Organisation organisational structures, processes and relationships b) Enabling Success either through existing resources & competences; or through separate resource pool i.e. people, information, finance, technology c) Managing of Change strategic management often involves changes (of structures, roles, cultural, relationships etc) within organisation, which need to be managed

CHANGES AFFECTING STRATEGIC MANAGEMENT

GLOBALISATION INCREASED COMPETITION TECHNOLOGY CHANGE KNOWLEDGE INTENSITY CORPORATE SOCIAL RESPONSIBILITY & SUSTAINABILITY DEREGULATION & PRIVATISATION ECONOMIC DOWN-TURN (CURRENT)

TYPES OF STRATEGY
INCREMENTAL STRATEGY; managing current activities for higher value continuous improvement through exploitation of current advantages REVOLUTIONARY / RADICAL STRATEGY; creating major changes for quantum jump in the market position through new innovative exploration Note; Strategic Drift takes place when the corporate strategy lags behind the changing environment more likely to happen in the former; but the gap may be made-up through the

Nature of Strategy
It is partly Proactive & partly Reactive. A company's Strategy evolves & emerges over time. Crafting Strategy is an on-going work, not one time event. Often influenced by vision, values & expectations of CEO and other influential stake holders. Its development involves both- analysis by senior management, and experimentation & adaptation from actual experiences.

CHARACTERISTICS OF STRATEGY
Provides overall game plan & direction of organisation. Long-term/futuristic direction of an organisation Unified, comprehensive & integrated plan Concerned with organisations scope, boundaries Seeks to use or create advantage over competition & environmental challenges Creation & deployment of resources, competences Decisions are complex, & usually involve changes in organisation e.g. on merger, acquisitions, joint ventures, partnership, consortiums, franchise Seeks strategic fit by correct positioning with business environment build & support identified market needs Affects operational decisions to be in line & reap strategic advantage

THREE LEVELS OF STRATEGY

CORPORATE LEVEL STRATEGY for corporate as a whole, scope i.e. geographical coverage, diversity of products/services & business units, allocation of resources to different parts & business units of the firm/organisation. BUSINESS LEVEL STRATEGY at Strategic Business Unit (SBU) level i.e. for success in its geographical or product/services and market areas. OPERATIONAL/FUNCTIONAL LEVEL STRATEGY- for component parts of organisation to effectively deliver resources, components, processes and people, for Business & Corporate level strategies success e.g. production units of organisation, marketing, HR etc.

VISION, MISSION, OBJECTIVE & GOALS

VISION: Strategic vision is where we are going and why. It is the strategic intent & directional road map of where the company intends to head in its strengths & in businesses, e.g. HMT's To be a leading Global Engineering Conglomerate focused on customer delight in our fields of endeavour. contd.

Developing Strategic Vision

Levi Strauss: We will clothe the world by marketing the most appealing & widely worn casual clothing in the world. Microsoft Corp.: Empower people through great software - any time, any place, and on any device. Greenpeace: To halt environmental abuse and promote environmental solutions.

VISION, MISSION, OBJECTIVE & GOALS (contd.)

MISSION: It is What business are we in? Who we are, what we do, and why we are here a brief overview of company's present business purpose. It is different from company's objective, e.g. Our mission is to give our customers the best food & beverage values that they can find. OBJECTIVE: Commonly such as make profit for share holders while selling cars to customers. The purpose & result of present activities. May be quantified. GOAL: General qualitative statement of aim or purpose e.g. to improve market position of orgn., to enhance wealth creation for stake holders, by reducing waste.

STRATEGY AND BUSINESS MODEL

Business Model A company's Business Model deals with revenue-costprofit economics of its Strategy i.e. its plan of profit making, as outcome of its strategy of product lines, competitive approaches, cost structures and profit margins. Its important components are Value Creation for customers; and Value Capture for business unit, e.g. Dell vs. HP PC selling, printer cartridge costs, car finance. Strategy The Strategy relates to competitive initiatives & business approaches irrespective of financial outcomes, whereas business model deals with flow of cost & revenue and business viability as outcome of the strategy.

ASSOCIATED VOCABULARY
STRATEGIC CAPABILITY Unique Resources and Core Competences of organisation that impart it strategic advantage over competitors. BUSINESS MODEL Describes structure and flow of products, services, information, & role of each participant e.g. component supply & product manufacture to distributor and retail, costs, revenue & profit of the organisation. STRATEGIC CONTROL Monitoring outcome of organisations strategy and suggesting corrective actions / revision of objectives, if required. ENVIRONMENT Organisations context of complex political, economic, social, demographic, technological, environmental & legal world creating opportunities or threats. The organisations external environment.

 STRATEGY AS DESIGN Logical process, through analytic & evaluative techniques, usually seen as topmanagements responsibility. Positioning of organisation through rational, analytic, structured & directive process. STRATEGY AS EXPERIENCE Future strategies are based on past adaptations & influenced by experiences of managers & others in the organisation. Factors of individual experiences & biases& collective experience & organisational culture influence strategy crafting. What is organisational culture? STRATEGY AS IDEA Based on emphasis on innovation, variety & diversity in organisation emerging from within, & not so much as supplanted by top management. High technology businesses require innovation & speed of change. In practice the above three may be complementary for

STRATEGY DEVELOPMENT APPROACHES THE THREE STRATEGY LENSES

STRATEGIC MANAGEMENT IN DIFFERENT CONTEXTS

MAY TAKE MANY FORMS DEPENDING ON TYPE OF ORGANISATION, ITS BUSINESS AND CIRCUMSTANCES: SMALL BUSINESS CONTEXT Small market/s, small range of products, and small geographical spread; top management / CEO / owner in full picture of customers, marketplace, competition, suppliers, finance etc, and hence formulates & implements competitive strategy within that space. MULTINATIONAL CORPORATION Diverse range of products and geographical markets, requiring many divisions, subsidiaries, spread out manufacturing units, corporate and regional head offices, and Strategic Business Units; need for balanced resources allocation, coordination, large logistics etc require complex strategic management and planning. Some of its SBUs may

STRATEGIC MANAGEMENT IN DIFFERENT CONTEXTS (contd.)

SERVICE ORGANISATIONS No physical product, competition on services provided insurance, consultancy & professional services. Customers value less tangible features of soundness of advice, attitude of staff, ambiance of office and promptness of service. Brand image & competitive advantage are important; strategies are crafted accordingly. PUBLIC UTILITY SECTOR Generally run by Govt./Federal organisations, duly financed by taxation revenues and/or consumption charges. Strategy more driven by political considerations/decisions. Devoid of competition, unless privatised. VOLUNTARY & NOT-FOR-PROFIT SECTOR Such as charities, NGOs, foundations, churches etc are run as per underlying values & ideologies of promoters & donors, through grants/donations. Competitive strategy is required

STRATEGIC MANAGEMENT PROCESS

Authors differently divide/club the steps in the Process of Strategic Management, with same essential elements: 1. Strategic Intent - Develop Strategic Vision of future product-customer-market-technology focus 2. Environmental Scan & Organisational Analyses 3. Identification of Strategic Alternatives 4. Choice of sound Strategy & Business Model 5. Implementation of Strategy 6. Evaluation, Monitoring & Control contd.

STRATEGIC MANAGEMENT PROCESS (contd.)

1. STRATEGIC INTENT Setting of organisations Vision, Mission and Objective i.e. Strategic Intent, is the first step in strategy formulation it defines what the organisation strives for, and what it stands for. The vision states what the organisation wishes to achieve in the long run; but for mission and objective there is hierarchy, as these get divided & sub-divided amongst various units, sections, sub-units & individuals each one contributing to achievement of objectives & mission of SBU and the organisation as a whole. contd.

STRATEGIC MANAGEMENT PROCESS ENVIRONMENTAL SCAN & ORGANISATIONAL ANALYSIS

2. ENVIRONMENTAL SCAN - Select Key variables >> Forecast Changes >> Estimate Impact of Change >> Strategy Selection of Key variables It is undertaken by senior managers with judgement, knowledge, analysis & intuition to select relevant variables. Keep in view probability high or low, of their occurrence. Forecast Changes Need to forecast the nature & pace of changes. Difficulty level depends on nature of variable and product/industry e.g. fast innovations in mobile phones applications, internet use difficult but population growth easy. In some cases use of forecasting techniques time-series, regression analysis etc. Estimate Impact of Change Need to estimate impact of those changes on the organisation. Consider both, changes of high probability major impact, and even low probability but major impact on organisation. Strategy &strategic decisions are realized only in the future, not in the present. Contd.

STRATEGIC MANAGEMENT PROCESS ENVIRONMENTAL SCAN & ORGANISATIONAL ANALYSIS (CONTD.)

Levels of Environmental Scanning (three) The External environment faced by a firm/corporate/business is here analysed at three levels: Remote Environment political, economic, socio-cultural, technological, environmental and legal (PESTEL) in which the firm competes. It is global in nature & exerts powerful influence on strategy. These may effect a number of industries;. Political - Political multi-national agreements, taxation policy, competition policy, etc Economic Countrys economy & numerous variables e.g. GDP growth, disposable income, interest rates, inflation, savings rate etc, influence strategy of firms. Social-cultural Distinct customs, outlook and way of life of the people, culture, aesthetics, values, attitudes etc of society affect strategy. Technology Pace of technology change is fast & accelerating- microelectronics, digital technology, computation, bio-technology, robotics, nuclear, medical science, information technology, web-sites, internet. Environmental Numerous environmental variables at play in strategy making eg environmental legislations, carbon-emissions, role of NGOs, CSR and sustainability. Legal Countrys legal framework for M & A, capital movement, industry regulations, industrial & labour laws, consumer protection, trade practices,

STRATEGIC MANAGEMENT PROCESS ENVIRONMENTAL SCAN & ORGANISATIONAL ANALYSIS (CONTD.)

Industry Environmental Scanning Exploring environmental characteristics of the industry in which the business competes. An Industry & Business Unit level analysis. Usually carried out by corporate for either M & A, or for setting performance standards for business unit. Deals with changes /policies that may affect all competitors in an industry e.g. entry barriers, statuary requirements, technology shift etc. All firms in the industry are likely to be affected to different extent. Industry Structure model The Five Forces Model, Porter (2008); the industrys structural factors grouped into five categories - Suppliers, Buyers, Entrants, Substitutes & Rivals/Competitors, have been adopted in this model for environmental scanning of industry:
. contd.

STRATEGIC MANAGEMENT PROCESS ENVIRONMENTAL SCAN & ORGANISATIONAL ANALYSIS (CONTD.)

Industry Structure The Five Forces Model, Porter (2008) a) Competitive Intensity Intense rivalry, price competition results in low profits. b) Barriers to Entry to Industry barriers of financial requirements, distribution channels, technology, economy of scale etc.; with low barriers high competition and low profits. c) Substitutes / Indirect Competitors different products meeting the same customer needs as own business e.g. cotton vs. synthetic fabric, camera vs. cell phone-cum- camera. d) Suppliers Firm & Supplier dynamics depend on their relative strengths and positions, volumes, importance of the firm for supplier and visa versa, economy of scales etc. e) Buyers / Customers with large immediate customers it is their relative bargaining power that dictates profits. Note: This model neglects the dynamics of Industry Value Chain the linked set of firms and the activities undertaken by them, affecting competitive advantages & superiority of Supply Chain of the main firm.

STRATEGIC MANAGEMENT PROCESS ENVIRONMENTAL SCAN & ORGANISATIONAL ANALYSIS (CONTD.)

1. Limitations of Industry Structure The Five Forces Model Works on presumption that firms are single industry & single business entities, whereas in practice they are multi-industry and also competition is at the formal alliance network level, with each level affecting it. There are dynamics within network, frenemy or froe (Sorrel 2008, CEO WPP, on relationship with Google). Second assumption is that an industry is easily definable in reality, not so. Industry boundaries are becoming fuzzy e.g. communication, entertainment, computing, publishing, Nokia competing with News Corporation? Terms such as edutainment, cosmeceuticals are emerging! This model assumes that structure of industry has got major impact on profitability of a business unit in the industry. A recent study has found that firm-specific factors are more important than the industry, for leaders & laggards, but for the average level management- good industry environment is needed for profitability. 4. The model fails to convey dynamic nature of most industries. Factors such as rapid changes due to product innovations, rapidly escalating competition based on price-performance characteristics & competition establishing first-mover advantages in product & market. Automobile industry going through restructuring vertical restructuring;

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STRATEGIC MANAGEMENT PROCESS ENVIRONMENTAL SCAN & ORGANISATIONAL ANALYSIS (CONTD.)

Industry Value Chain (IVC) the linked set of firms & their activities play significant part in ensuring the firms competitive advantage based on superiority of supply chain management, e.g. Dell & Wal-Mart. Changes at any level in the value chain can influence competitiveness of the firm e.g. PET bottles vs. aluminium cans for beverages. IVC also permits elimination of a level in the chain, e.g. internet booking of airlines tickets, direct marketing. Profitability may however vary at different levels of the chain depending on relative bargaining positions, e.g. Microsoft & Intel have higher margins than IBM, for their operating system and microprocessors supplied to latter.

STRATEGIC MANAGEMENT PROCESS ENVIRONMENTAL SCAN & ORGANISATIONAL ANALYSIS (CONTD.)

The Business Unit Environment Analysis - Customer & Competitor Analyses This component of external environment analysis seeks to assess influence of likely changes on the business unit, in relation to own and competitors competitive advantages. Focus is on identifying opportunities & threats emerging from changes in the customers requirements, and in competition. In a purchase process, customer plays many roles gatekeeper, influencer, decision-maker, buyer & user. Customer Analysis; understanding changing customer needs, values, segments Customer Value needs & dissatisfactions of customers, as also the changes taking place e.g. low cost products being introduced in downturn time (P & G); high price with improved value/quality. -- Market Segmentation grouping of customers and potential customers having similar needs, the firm may focus on segments in which it enjoys competitive advantage. With changing customer needs, firm must continually identify new segments & opportunities. Increasing share in a turbulent market is easier than in a stable market. -- Features versus Benefits Attributes vs. benefits of product/service offered by the firm, are important consideration for customer benefit/value

STRATEGIC MANAGEMENT PROCESS ENVIRONMENTAL SCAN & ORGANISATIONAL ANALYSIS (CONTD.)

Competitors Analysis a proactive & pre-emptive process having two distinct levels of analysis Business Unit and MultiIndustry, consisting of Network Level & Corporate Level Business Unit Level Competitors Analysis; Encompassing present & potential future competitors, that represent threat through competition in meeting customer needs for same product/service as own. Steps for analysis at both levels are same; -- Identification of competitors both present & potential competitors, good profits attract more firms, focus on those with high threat to own businesses -- Gathering information & Analysis Profiling of serious threat identified competitors, through intelligence gathering & analysis of their resources, and capabilities- financial, technological, skills, portfolio analysis, and also close examination of their value chains -- Competitive moves and actions of the competitors, and our moves in response

STRATEGIC MANAGEMENT PROCESS ENVIRONMENTAL SCAN & ORGANISATIONAL ANALYSIS (CONTD.)

Analysing Competitors - Multi-Industry Level Competition , this may be seen in two parts as follows; Network Competition Fast changes in product development, increasing costs of business and reduced margins, have brought the global trend of out-sourcing to specialised sources rather than in-house production of components, often for higher standards or for lower cost. This typically results in networked relationships with suppliers of quality products/components. This also results in Supply Chain efficiency, and minimising working capital both important for competitiveness. Close network relationship & cooperation within the network is essential. Worldwide alliances are coming up e.g. for air travel Star Alliance, supply chains of Toyota, Honda. Corporate-level Competition This comes into play when corporate with multiple businesses in similar products/services compete with each other. They are identified by assessing overlap in their business portfolios e.g. VW & Toyota, Airbus & Boeing etc. Factors for analysis are 1) insight into competitors capabilities financial performance, business portfolio, physical facilities, knowledge assets, functional strengths & like, and 2) gathering

Environmental Scan - Organisational Analysis Resource View

Strategic position of a firm has got two different views one based on Structure of Industry and the other on Resources of the firm. Structural characteristics of Industry (discussed above) are important but are not the sole determinants of firms success, as proved by results of different firms operating in the same Industry Structure, e.g. Tesco vs. Carrefour retail chains. Resource view has that the firm has unique and hard to imitate resources that give it competitive advantage over rivals thus generating superior financial performance. However, in a dynamic environment most resources may have limited life, and continuous innovation may be required for sustainability. Further Resources per se are important but not sufficient condition for superior performance, e.g. GM vs. Toyota in the US. But the firms resources are central to building strategy. Resource Deployment how well the firm utilises current resources Resource Generation How well the firm generates new resources or improves combination of current resources Competitive Advantage The way a firm utilises its resources & capabilities to generate value-creating strategy, which competitors find difficult to imitate. Measured in relation to competitors, while economic profit is relative to capital employed.

Environmental Scan - Organisational Analysis - Resource View (contd.)

Organisations Strategic Capability; Resources Tangible & Intangible. Further, the Tangible Resources may be divided into two parts - Financial & Physical; and Intangible Resources as Intellectual Capital/Assets, consisting of Human, Structural & Customer Capital. Tangible Financial Resources - firms capability for future investments, be it plant, people, processes, acquisitions, innovations, capacity to raise capital & internally generate funds measured by free cash flow etc. Tangible Physical Resources - plant, equipment, technical & technological assets, reserve raw material etc.

Environmental Scan - Organisational Analysis - Resource View (contd.)

Intangible Resources Non-physical in nature such as brandequity, trademark, patents, business processes. These are not included in firms balance sheet Intellectual Assets/capital Knowledge, information, skills, experience & expertise used by the firm to create value; further divided into three categories - Human Capital, Structural Capital, and Customer Capital -- Human Capital Knowledge, skill, ability, intelligence, creativity, motivation -- Structural Capital Values, ethics, culture, philosophy, database, software, hardware -- Customer Capital value of relationship with customers, brand equity, market share, profitability, including understanding customers demands & preferences

Environmental Scan - Organisational Analysis - Resource View (contd.)

ORGANISATIONAL RESOURCES & CAPABILITIES

A resource by itself, in isolation, does not accrue strategic capability to a firm the value is realised in its combination with other resources, and the combination is then recognised as the firms capability. Resources deployment and integration enables firm to excel in processes for delivering quality/value to customers. Firms capabilities are embedded in its processes be that development of new products, brand management, logistics or supply chain management etc., for each of which it needs to integrate a number of disparate functional groups/departments, towards common objectives. Further, a firm may benchmark itself in comparison to other competitors in the industry for new product development speed, resources consumed, product success etc.

Environmental Scan - Organisational Analysis (contd.)

Core Capabilities Some of firms capabilities are seen as drivers of strategy, being more significant than others, and fundamental to performance for; i) disproportionate impact on delivering customer satisfaction or efficiency in delivering of value, ii) provide basis for entering new markets Examples; Canons precision mechanics, fine optics, microelectronics & electronic imaging Toyota possession of global distribution network, quality production process, design capability and technology

Environmental Scan - Organisational Analysis (contd.)

Capabilities & Competitive Advantages It is important to evaluate the profit-earning potential of a capability assessed in terms of following properties: Valuable It is valuable to the extent it allows to reduce costs or increase revenue, over what it would be without it. Sonys miniaturisation of electronics; e.g. Wal-Marts stores locations, brand value, and supply chain management. Scarce Capability which is not widely & readily available to competitors. Non-imitable Not easily replicated by competitors, such as location site, brand value etc Sustainable Capability which competitors would take a long time to imitate. Firms prefer the ones that give cost advantage over longer periods. Appropriable Whether or not, or to what extent the firm can appropriate the returns delivered by the capability, which in some industry go to customers or employees; such as advertising industry, network of relationships in case of financial services, patents for innovations.

Environmental Scan - Organisational Analysis (contd.)

Dynamic Capabilities In dynamic environment, this is firms capability & mechanism to build and re-configure its existing capabilities for future success, besides deployment of resources for current competition success. How good is the firm at renewing its capabilities and resource base? Firms portfolio of capabilities, needs to go through changes, over time, in response to changing environment of industry in future, some of them may become less important while some others more.

Environmental Scan - Organisational Analysis (contd.)

Value Chain Value Chain is the activities within a firm, which it has undertaken in order to be able to compete. It also includes the linked set of firms, which together create a product or service. Value Chain provides a useful framework for understanding relative magnitude of costs of various segments, in the value chain; and therefore it is important to first familiarise with the context of Cost Drivers. The ultimate cost & value together, need to be understood for the complete chain. Attempt at reduction of costs at the expense of adding value for customer, is not beneficial for the firm. Cost Drivers Economy of Scale Generally speaking, with fixed overhead costs, increase in scale of production will reduce per unit cost. If all costs are variable, no advantage may be achieved. Often, economy of scale consideration drives mergers, acquisitions & alliances. Experience Effect This occurs when with experience of the firm in producing a significant numbers of products, the per unit cost of production declines due to greater efficiency. Process of learning doing things faster, better and with less wastage. Value Drivers While cost reduction in value chain, is important but it needs to be analysed in relation to how & where value is added for customers. Activities key to value creation for customers can not be

Environmental Scan - Organisational Analysis (contd.)

Knowledge & Intellectual Capital We are moving towards knowledge based society with firms becoming more knowledge intensive e.g. Google, SAP, & Apple. Firms are developing products & services in which increasing amount of knowledge and intellectual capital are embedded, having value much more than the hardware, such as computers, automobiles. Cars come fitted with GPS and knowledge systems for management of fuel, braking effort, electronic stability control and fault diagnosis etc. The mobile phones have got GPS and many smart systems based on knowledge intensity. Information systems used by firms for inventory management, enterprise resource planning software (ERP) etc are some of the examples. Therefore, knowledge & intellectual capital are significant for strategic management of a firm. It may be Explicit or Tacit knowledge - former which can be written down or articulated, latter which is tied to senses, skills, intuition & perceptions of individuals, not easy to articulate. Information vs. Knowledge Information is processed/analysed data, put in useful & intelligible format to facilitate its user. It may be put in database, manuals etc., for ease of transmission to user. Knowledge, on the other hand is deeper & broader, and it makes data relevant & useful. Information & data may come from ERP system, CRM system, or from ecommerce transactions etc. of the firm, but individuals intellectual ability is needed to convert it into knowledge. Knowledge combined with insight & imagination, leads to innovations & inventions.