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Concept of Strategy

Concept of Strategy

Classical thinking on strategy

to fight and conquer is not supreme excellence . . ;


. . . supreme excellence consists in breaking the enemys resistance without fighting . . .
Art of War
Sun Tzu (360 BC)

Concept of Strategy

The Origins of Strategy

Know the other and know yourself: Triumph without peril. Know Nature and know the Situation: Triumph completely.
- Sun Tzu (360 B.C.)

If half of strategic thinking is predicting what the other player will do, the other half is figuring out what he knows.

Concept of Strategy

What is Strategy?
(Porter, M.E. (1996), What is Strategy, Harvard Business Review, 74(12): 61 -78.

Business strategy or Corporate strategy can be best understood from what it does to the organization

Rivals can easily copy your improvement in quality and efficiency. But they shouldnt be able to copy your strategic positioning (What distinguishes your company from all the rest)

Strategy is the creation of a unique and valuable position, involving a different set of activities.

Strategy require you to make trade-offs in competing--to chose what not to do.
Strategy involves creating fit among a companys activities.

Concept of Strategy

Differences between Operational Excellence and Strategy

high

Operational effectiveness means performing similar activities better than rivals perform them

Strategic positioning means performing different activities from rivals or performing similar activities in different ways

Non-price buyer value delivered

Growth

low high Relative cost position low

Concept of Strategy

Why is strategy required ?

Business growth

Survival

Time

(Sustaining long term success)

Impact

Goal Achievement (integration of short term and long term goals)

Profitability

Profits

Time Horizon Time

Concept of Strategy

Sources of Superior Profitability

INDUSTRY
ATTRACTIVENESS

RATE OF PROFIT ABOVE THE COMPETITIVE LEVEL

Which industries should we be in?

CORPORATE STRATEGY

How do we make money?

COMPETITIVE ADVANTAGE

How should we compete?

BUSINESS STRATEGY

Concept of Strategy

Focus of strategy

Activity

Area

Outcomes

Direction of the business

How should the firm compete

Strategy focuses on . . .
Scope of the business activities
Which areas to compete

Which markets and consumer segments?

To meet stakeholders expectation

Concept of Strategy

Key dimensions of strategic decisions and areas of decisions

Some typical areas of strategic decisions

Decisions are taken at the top level of the business

Modernization / Divestment Product / Brand Launch Entry into new markets /geographies

Decisions have long term implications on the business

Strategic alliances Acquisitions

Decisions are multifunctional and could be multi - business in their impact

Overseas expansion

Turnaround / BPR / Restructuring

Concept of strategy thought


Evolution in corporate strategy
1950s 1960s 1970s 1980s
early late

1990s Themes & Issues


Financial planning & control Corporate planning Corporate strategy Positioning Quest for competitive advantage & shareholder value

1990s
Strategic innovation

Concepts & Techniques

Budgeting project appraisal

Forecasting & investment planning

Portfolio planning. Synergy market share

Analysis of industry & competition

Resource analysis. Case competencies

Dynamic sources of advantage Knowledge management Co-operation

Implementation

Emphasis on financial management

The rise of corporate planning departments & formal planning

DiversifiIndustry and cation. market Quest for select ivity. global market share

Restructuring Virtual orgaBPR. nization. Re-focussing Alliances Outsourcing competing for the future

Concept of Strategy

Difference between strategy and tactics

All men can see is the tactics from which victory evolves, what none can see is the strategy from which tactics evolve
- Sun Tzu (360 B.C.)

Concept of Strategy

Difference between strategy and tactics

Strategy

Tactics

Where How

Yes Yes

Strategy

Tactics

Where

Segments Industry Geographies


Financial management Marketing Information systems Production (JIT,TQM etc) HR

How

Concept of Strategy
Strategic Control

The key elements of strategic management

Performance

Strategy areas
Strategy Formulation Strategy Implementation

Environment

Organization

The process of strategy does not distinguish between types and scale of businesses...

Concept of Strategy
The structural framework of business ...

Single Unit Business


Corporate/ business level

Multi-Unit Business
Corporate/ business level

R&D and Product strategies

Financial/ strategies

Marketing strategies

Human relations strategies

Strategic Business unit - 1

Strategic Business unit - 2

R&D and Product strategies

Financial/ strategies

Marketing strategies

Human relations strategies

Product A Product B Product C

Concept of Strategy
Varying levels of analysis
Corporate Strategy

Where to Compete?

How to Compete?

Business Strategy

How to Contribute?

Functional Strategy

Choice of Products Choice of Markets Choice of Competitors

Concept of Strategy
Hierarchy of objectives and strategy
Ends (What is to be achieved?) Mission, including goals & philosophy Means (How is it to be achieved?)

Strategic Decision Makers


Board of Directors Corporate Managers Business Managers Functional Managers

Long-term objectives

Grand strategy

Annual objectives

Short-term strategies & policies

Note:

indicates a principal responsibility;

indicates a secondary responsibility

Concept of Strategy
The Three Big Strategic Analysis Questions

Where are we now?


Desired position Effort Gap

Where do we want to go? - Products / Services those can be launched - Buyer groups those could be served

How will we get there?

Make

Activity options Buy

Current position Gap analysis will reveal the difference between position.

Growth lies in identifying opportunities in markets

Study of options will indicate least risk route to grow

End of introduction deck on strategic management

Flow of crafting strategy

Company mission & vision External Environment Internal analysis

Strategic analysis & choice

Feedback

Feedback

Long-term objectives

Generic & grand strategies

Short-term objectives; reward system

Functional tactics

Policies that empower action

Restructuring, reengineering & refocusing the organization


Legend

Major impact
Minor impact

Strategic control & continuous improvement

Concept of Strategy
Andrews Strategy Framework
Source: Kenneth R. Andrews, The Concept of Corporate Strategy, 1971 Environmental Conditions and Trends
Economic Technical Physical Political Social Community Nation World Evaluation to determine best match of opportunity and resources

Consideration of all combinations

Distinctive Competence
Capabilities: Financial Managerial Functional Organizational Reputation History

Corporate Resources
As extending or constraining opportunity

Opportunities and Risks


Identification Inquiry Assessment of Risk

Choice of Products and Markets


Economic Strategy

Identification of strengths and weaknesses Programs for increasing capability

Concept of Strategy
Key steps in strategy formulation Key definitions to start with . . .

Mission
Why we exist

Values
Whats important to us

Vision
What we want to be

Strategy
Our game plan

Concept of Strategy
Key steps in strategy formulation

The Vision Thing

Mission & Vision

Specifies unique purpose

of company
Identifies scope of operations

Describes product,

market, and technological


areas of emphasis

Reflects values and priorities of decision makers Expresses approach to social responsibility efforts

Concept of Strategy
Key steps in strategy formulation

Internal Analysis
(1) External and Internal assessment

a. Analysis of market and environmental opportunities and threats

Analysis of Business Strengths


What are the assets that we must grow?
b. Analysis of business strength & weaknesses

How critical are these assets to gain market share?

Are our competencies strong and effective?

Concept of Strategy
Key steps in strategy formulation

Internal Analysis Resource and Capability appraisal


Resource mapping
Borrowing capacity (Specify Capital / Revenue)

1 - 5 scale 1 5

Capabilities
Financial system and

1 - 5 scale 1 5

management

Internal Fund generation Plant & Machinery

Market information system Development of new

(Modern / Efficient etc)


products

Patents and Copy rights R&D Technical Employees (Specify area)

Efficient volume

manufacturing

Designs / Style

- Information on market trends - Dedicated personnel to execute job

Brand awareness Reputation with suppliers Training of staff

(Technical)

Marketing support

Brand management
Speed of distribution

(Field staff) Overall Rating

Concept of Strategy
Key steps in strategy formulation Aligning the resources to the organization
A D Little model for simplification of organizational responsibilities

Set strategies to satisfy key stakeholders Stakeholders by improving critical business processes and aligning resources and organization Processes

Resources

Organization

Concept of Strategy
Key steps in strategy formulation

Improvement of performance
Profit Revenue = Revenue Cost = Price x Volume

Not only . . .
Increase revenues by increasing price Increase revenue by increasing volume Increase revenue and hold cost constant Increase revenues in excess of cost increases

But also
Lower cost and hold revenue constant Lower costs in excess of revenue losses Lower costs and increase revenues (price increases)

Concept of Strategy
Key steps in strategy formulation

Growth Strategy alternatives

Desired position Sales growth/ Volume growth

Diversification
Strategic gap analysis reveals dimensions that can be pursued for growth

Integrative Intensive

Current position

Time

Strategic management growth models


Fundamental models for strategic thinking

(1) External and Internal assessment

a. Analysis of market and environmental opportunities and threats b. Analysis of business strength & weaknesses

Standardized Models
Industry attractiveness

The Mckinsey / GE Business BCG Growth Share - Matrix


Relative Market Share H L
Investment & Growth (G)

Assessment Array

High

(1)Medium External and Internal assessme nt

Low
a. Analysis of market and environmental opportunities and threats

Business Strengths

High

Selective Growth (G)

Selectivity (Y)

Market Growth

Star

Problem Child

b. Analysis of business strength & weaknesses

Medium

Selective Growth (G)

Selectivity (Y)

Harvest (R)

Cash Cow

Dog

Low

Selectivity (Y)

Harvest (R)

Harvest (R)

All models primarily focus on resources and opportunity mapping

Strategic management growth models Fundamental models for strategic thinking

(1) External and Internal assessment

a. Analysis of market and environmental opportunities and threats b. Analysis of business strength & weaknesses

Standardized Models
A.D. Littles Business Profile Matrix
Embryonic

Stage of Industry Maturity


Growth Mature Aging

Competitive Position

Dominant Strong Favorable Tentative Weak

All models primarily focus on resources and opportunity mapping

Strategic management growth models Fundamental models for strategic thinking

(1) External and Internal assessment

a. Analysis of market and environmental opportunities and threats b. Analysis of business strength & weaknesses

Standardized Models
Shell Internationals Directional policy Matrix

Prospects for sector profitability Unattractive Average


Phased withdrawal Custodial
Phased withdrawal

Attractive
Double or Quit Try harder

Companys competitive capabilities

Weak

Disinvest

Medium

Growth

Strong

Cash generation

Growth Leader Leader

All models primarily focus on resources and opportunity mapping

Revisiting the portfolio

Relative Market Share


High High Low

Promote portfolios Market Growth Nurture portfolios


Low

Recruit portfolios

Retire portfolios

The process of strategic growth lies in the capability of generating products

under the portfolio and sustaining current portfolios

Concept of Strategy
Key steps in strategy formulation

No two species that depend on the same prey will think differently Gause Laws of natural competition

External Analysis Competition


A strategic group is a group of firms in an industry following the same or similar strategy

Identify principal strategic variables which distinguish firms

Position each firm in relation to these variables

Identify clusters of common competing characteristic

Assess

Evaluate

Rank

Concept of Strategy

Key steps in strategy formulation

External Analysis
(1) External and Internal assessment

a. Analysis of market and environmental opportunities and threats

b. Analysis of business strength & weaknesses

Environmental changes
What is the level of uncertainty? Is it relatively static - or are there signs of change?

How are the changes taking place?


What/ Who is driving the changes? Are the changes simple or complex?

Concept of Strategy
Key steps in strategy formulation

External Analysis Competition

Broad

REGIONALLY FOCUSED BROAD-LINE PRODUCERS e.g. Fiat, PSA, Renault, Rover, Chrysler

GLOBAL, BROAD-LINE PRODUCERS e.g., GM, Ford, Toyota, Nissan, Honda, VW

Product Range

NATIONALLY FOCUSED, INTERMEDIATE LINE PRODUCERS e.g., Maruti

GLOBAL SUPPLIERS OF NARROW MODEL RANGE e.g., Volvo, Subaru, Isuzu, Suzuki, Saab, Hyundai
LUXURY CAR MANUFACTURERS e.g., Jaguar, Rolls Royce, Daimler-Benz, BMW

NATIONALLY- FOCUSED, SMALL, SPECIALIST PRODUCERS e.g., Bristol (U.K.), Classic Roadsters (U.S.), Morgan (U.K.)

Narrow National

PERFORMANCE CAR PRODUCERS e.g., Porsche, Maserati, Lotus

Geographical Scope

Global

Concept of Strategy
Key steps in strategy formulation

External Analysis Competition


OBJECTIVES

What are competitors current goals? Is performance meeting the goals? How are its goals likely to change?

PREDICTIONS

What strategy changes


STRATEGY

How is the firm competing?


ASSUMPTIONS

will the competitor initiate?

What assumptions does the competitor hold about the industry and itself?
RESOURCES & CAPABILITIES

How will the competitor respond to our strategic initiatives?

What are the competitors key strengths and weaknesses?

Concept of Strategy
Key steps in strategy formulation

External Analysis Competition


It is not the size of the dog in the fight .... it is the size of fight in the dog
Slow High

Speed of response Selective

Fast

Laid back competitors Predictability of response


Stochastic

competitors

Tiger
competitors

competitors
Low

In a fight it is not the size of the animal . . . its the size of its mouth. Bigger the mouth .. larger the bite

Concept of Strategy
Key steps in strategy formulation

External Analysis Competition from the five forces


Threat

Office Car goer Product A Product B Product C Product D

Family Car

Outstation Car(SUV)

Threat of of New New Entrants Entrants

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Threat of Substitute Products

Concept of Strategy
Key steps in strategy formulation

External Analysis Competition (Five Forces) Internal Rivalry


Threat Threat of of New New Entrants Entrants

Numerous or equally balanced competitors


Slow growth industry High fixed costs

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

High storage costs Lack of differentiation or switching costs Capacity added in large increments

Threat of Substitute Products

Diverse competitors High strategic stakes High exit barriers

Concept of Strategy
Key steps in strategy formulation

External Analysis Competition (Five Forces)


Threat

Buyer groups are likely to be more powerful if

Threat of of New New Entrants Entrants

Buyers are concentrated or purchases are large relative to sellers sales


Purchase accounts for a significant fraction of suppliers sales
Bargaining Power of Buyers

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Products are undifferentiated Buyers face few switching costs Buyers industry earns low profits

Threat of Substitute Products

Buyer presents a credible threat of backward integration Product unimportant to quality

Buyer has full information

Concept of Strategy
Key steps in strategy formulation

External Analysis Competition (Five Forces)

Supplier groups are likely to be more powerful if Supplier industry is dominated by a few firms

Threat of New Entrants

Suppliers products have few substitutes


Buyer is not an important customer to supplier Suppliers product is an important input to buyers product Suppliers products are differentiated Suppliers products have high switching costs

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Threat of Substitute Products

Supplier poses credible threat of forward integration

Concept of Strategy
Key steps in strategy formulation

External Analysis Competition (Five Forces)


Barriers to entry
Threat of New Entrants

Economies of Scale Product Differentiation Capital Requirements

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Switching Costs Cost Disadvantages Independent of Scale Government Policy

Threat of Substitute Products

Expected Retaliation

Concept of Strategy
Key steps in strategy formulation

External Analysis Competition (Five Forces)


Substitutes
Threat of New Entrants

Products with improving price/performance tradeoffs relative to present industry products

For Example:
Bargaining Power of Suppliers Rivalry Among Competing Firms in Industry Bargaining Power of Buyers

Electronic security systems in place of security guards Fax machines in place of overnight mail delivery

Threat of Substitute Products

Concept of Strategy
Key steps in strategy formulation

External Analysis Entry and Exit barriers

Exit Barriers
Low High

Low Entry Barriers High

Low, Stable Returns

Low, Risky Returns

High, Stable Returns

High, Risky Returns

Concept of Strategy
Key steps in strategy formulation

External Analysis PEST analysis

Political
Fair-trade decisions
Antitrust laws Tax programs Minimum wage legislation

Economic
General availability of credit Level of disposable income Propensity of people to spend Prime interest rates Inflation rates Trends in growth of gross national product

Social
Entry of large numbers of women into labor market Accelerating interest of consumers and employees in quality-of-life issues Shift in age distribution of population

Technology
New products Improvements in existing products Manufacturing and marketing techniques

Ratings on each parameter will assist in environmental study

Concept of Strategy
Key steps in strategy formulation

External Analysis - Rating of the external environment

Political frames
Opportunities

Economic frames

Socio/ Demo frames

Technological frames

Threats

List out Opportunities and Threats in all segments and subsequently rate them

High risk potential Moderate risk potential

Low risk potential

Concept of Strategy
Key steps in strategy formulation

External Analysis
Opportunities
- Competition is driving out smaller players and consolidation will increase price levels

Threats
- Change of legislation may restrict imports critical for our product

Existing

Product
- New technology is allowing New better performance platforms and cost reduction possibilities - New technology is unstable and the results may come at very high costs

Opportunities/ Threats
- Increase in customer base is Existing generating demand in our segment. - As the markets expand, cheap low cost substitutes may emerge and affect our profits

Markets
- New markets throw up opportunities complementing our current business line Diversification pays off very well. - In the new market demand is high but is it stable? New capacity added could be costly

New

Concept of Strategy
Key steps in strategy formulation

Understanding the Value Chain

Firm Infrastructure

Support (Enabling) Activities

Human Resource Management Technology Development Procurement

M a r g i n

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

After-Sales Service

Primary (Core) Activities


Shaded area indicates dominant strength of the SBU

Concept of Strategy
Key steps in strategy formulation Generic Strategies

Focus
STRATEGIC ADVANTAGE
Uniqueness Perceived by the Customer Low Cost Position

Differentiation

STRATEGIC TARGET

Industry wide

DIFFERENTIATION

OVERALL COST LEADERSHIP

Particular Segment only

FOCUS

Cost Leadership

Concept of Strategy
Key steps in strategy formulation
Structural break down of key drivers
Cost Leadership Low Product Differentiation Market Segmentation (Principally based on price) Low (Mass Market) Differentiation Focus

High (Principally by Uniqueness) High (Many segments)

Low or High (Price or Uniqueness) Low (One of a few key segments) Low or High (Efficiency or Value Added)

Low Cost Structure (Efficiency)

High (Value Added)

Distinctive Competency

Manufacturing and Materials Management

Research and Development, Marketing

Any kind of distinctive competency

Concept of Strategy
Key steps in strategy formulation Key Features of generic strategies Cost Leadership
Price competition in industry is very vigorous industry product is standardizedcommodities There are few ways to achieve meaningful product differentiation-buyers are only sensitive to price differences

Differentiation
There are many ways to differentiate a product or service and many buyers perceive these differences to have value Buyers needs and uses for your product are diverse Few rival firms are following a similar differentiation approach Point of differentiation cannot easily be copied by competitors

Focus
The segment is big enough to be profitable -the segment has good growth potential The segment is not crucial to the success of major competitors The focusing firm has the skills and resources necessary to serve the segment The focuser can defend against challengers based on loyalty and the goodwill it has built

Low or no switching costs are incurred by buyers


Buyers are large, and have significant power to drive down prices

Concept of Strategy
Key steps in strategy formulation ROIC improvement alternatives under Grand Strategy and Functional Strategy
Profit Improvement Productivity Improvement Sales Growth

Existing assets
Investment - Innovation - Diversification

Change asset base

Market Penetration

Market Development

Product Development

Disinvestment - Redevelopment of capital resources

Cost reduction of current operations

Improve asset utilization (experience & utilization)

Increase price / reduce discounts

Increase usage

Take competitors customers

New segments

Convert non users

Existing markets

New markets

Cash and margin focus

Growth focus

Concept of Strategy
Key steps in strategy formulation

Implementation

Our learnings are based on the McKinsey & 7s model

Strategy Structure Shared Values


(culture)

Systems

Skills
(management)

Style
(leadership)

Staff
(management)

Factors impacting implementation

Concept of Strategy
Key steps in strategy formulation

Structure (Organization of firms activities)

Leadership (Style, staffing, and skills)

Culture (Shared values creating behavioral norms)

Concept of Strategy
Key steps in strategy formulation

Implementation
Functional organization
CEO

Structure
Geographical organization
Chief Executive

Matrix organization
Chief Executive Officer

Engineering

Personnel

Marketing

Corporate Staff Finance & Accounting Personnel Marketing Legal Planning Research & Development

Vice President, Engineerin g Projec t Mana ger A Enginee ring Staff

Vice President, Production

Vice President, Purchasing

Vice President, Administra tion Administra tion Coordinato r

Production

Finance & accounting

Producti on Staff

Purchasi ng Agent

General Mgr. Western District

General Mgr. Southern District

General Mgr. Central District

General Mgr. Northern District

General Mgr. Eastern District

Projec t Mana ger B

Enginee ring Staff

Producti on Staff

Purchasi ng Agent

District Staff Personnel Accounting & Control

Administra tion Coordinato r

Projec t Mana ger A

Enginee ring Staff

Producti on Staff

Purchasi ng Agent

Administra tion Coordinato r

Engineering

Production

Marketing

Concept of Strategy
Key steps in strategy formulation

Implementation

Leadership and Culture

Key tasks of a leader


Strategic leadership

Clarifying strategic intent

Building an organization
Management skills to cope with uncertainty

Shaping organizational culture

Concept of Strategy
Key steps in strategy formulation

Implementation

Tasks for Re structuring the business

Expand

Expansion Mergers and Acquisitions Joint Ventures

Contract

Sell-offs Spin offs (Sell to another management) Split offs (Maintain control in management but reduce stake) Split ups (Dissolve JVs or Divisions)

Concept of Strategy

End of Discussion