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Strategic Management

Prof. DEBASISH DUTTA

Introduction

Strategy
strategy -derived from a Greek wordstrategos -meaning-

General
Prof. DEBASISH DUTTA/Strategic Management/MITCOM 3

Strategy
Oxford Dictionary Meaning Strategy
The art of war The management of an army or armies in campaign Plan of action in policy of business or politics

The word Strategy was first used in the English language in 1656. The development and usage of the word suggests that it is composed of stratos (army) and agein (to lead).
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Strategy
Strategy refers determination of the Purpose or Mission and Basic Long Term Objectives or Vision of an enterprise, and adoption of courses of action or Strategy and allocation of resources necessary to achieve these aims.

Prof. DEBASISH DUTTA/Strategic Management/MITCOM

The Concept of Strategy


A strategy could be:
plan or course of action or a set of decision rules making a pattern or creating a common thread; the pattern or common thread related to the organisation's activities which are derived from the policies, objectives and goals; related to pursuing those activities which move an organisation from its current position to a desired future state; concerned with the resources necessary for implementing a plan or following a course of action; and connected to the strategic positioning of a firm, making trade-offs between its different activities, and creating a fit among these activities. the planned or actual coordination of the firm's major goals and actions, in time and space that continuously co-align the firm with its environment.
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Scope of Strategic Management


J. Constable has defined the area addressed by strategic management as "the management The decisions must processes and decisions which determine therelate An organization is managed long-term structure and activities of the clearly to a solution of Management process as The strategic time horizon organization". by people within a structure. perceived problems (how relate to how strategies are This is a potentially limitless is long. However, it for This definition incorporates themes: The decisions which result to five avoid a threat; how to created and changed. area of key study and we

Management process from the way that managers capitalize on an normally shall centre upon can be very short. Management decisions work together within the the opportunity). all activities which affect Time scales structure can result in organization. Structure of the organization strategic change. Activities of the organization
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company in real trouble

Importance of Strategic Management


Strategic management takes into account the future and anticipates for it. A strategy is made on rational and logical manner, thus its efficiency and its success are ensured. Strategic management reduces frustration because it has been planned in such a way that it follows a procedure. It brings growth in the organization because it seeks opportunities. With strategic management organizations can avoid helter & skelter and they can work directionally. Prof. DEBASISH DUTTA/Strategic
Management/MITCOM

Importance of Strategic Management


Strategic management also adds to the reputation of the organization because of consistency that results from organizations success. Often companies draw to a close because of lack of proper strategy to run it. With strategic management companies can foresee the events in future and thats why they can remain stable in the market. Strategic management looks at the threats present in the external environment and thus companies can either work to get rid of them or else neutralizes the threats in such a way that they become an opportunity for their success. Strategic management focuses on proactive approach which enables organization to grasp every opportunity that is available in the market.
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Dimensions of Strategic Decisions


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


Traditional Planning
1.

Strategic Planning

2.

3.

4.

5.

It is concerned with goal 1. It is concerned with new derived from established objectives and strategies. objectives 2. It combines activities that It is concerned with form an unique value chain individual objectives 3. It is performed by top May be carried out lower management management 4. It is integrated and have It is more functional or corporate level and business unit wise or departmental level approach wise approach. 5. It has less procedures and It deals with goals that is may trade in unchartered validated through past path experiences Prof. DEBASISH DUTTA/Strategic
Management/MITCOM

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Advantages & Disadvantages of Strategic Management


Advantages Financial benefits Problem prevention Increased interactivity Better employee incentive Reduced gaps in activities Lesser reluctance to change Disadvantages A costly exercise Sense of frustration among employees Evading responsibility

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Formality in Strategic Management


Formality refers to the degree to which participants, responsibilities, authority, and discretion in decision-making are specified. The size of the organization, its predominant management styles, the complexity of its environment, as production process, its problems, and the purpose of its planning system all play a part in determining the appropriate degree of formality.
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Benefits of Strategic Management


Strategy formulation activities enhance the firms ability to prevent problems. Group-based strategic decisions are likely to be drawn from the best available alternatives. The involvement of employees in strategy formulation improves their understanding of the productivityreward relationship in every strategic plan and thus heightens their motivation. Gaps and overlaps in activities among individuals and groups are reduced as participation in strategy formulation clarifies differences in roles. Resistance to change is reduced.
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Three Levels of Strategy


The decision-making hierarchy of a firm typically contains three levels: Corporate Level Strategy Business Level Strategy Functional Level Strategy

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Three Levels of Strategy


Corporate Level Strategy
At the top of this hierarchy is the corporate level, composed principally of a board of directors and the chief executive and administrative officers. In a multibusiness firm, corporate-level executives determine the businesses in which the firm should be involved. Corporate-level strategic managers attempt to exploit their firms distinctive competences by adopting a portfolio approach to the management of its businesses and by developing long-term plans, typically for a five-year period.
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Three Levels of Strategy


Business Level Strategy
In the middle of the decision-making hierarchy is the business level, composed principally of business and corporate managers. These managers must translate the statements of direction and intent generated at the corporate level into concrete objectives and strategies for individual business divisions or SBUs. They strive to identify and secure the most promising market segment within that arena.
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Three Levels of Strategy


Functional Level Strategy
At the bottom of the decision-making hierarchy is the functional level, composed principally of managers of product, geographic, and functional areas. Whereas corporate- and business-level managers center their attention on doing the right things, managers at the functional level center their attention on doing things right. Thus, they address such issues as the efficiency and effectiveness of production and marketing systems, the quality of customer service, and the success of particular products and services in increasing the firms market shares.
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The Strategy Makers


The ideal strategic management team includes decision makers from all three company levels (the corporate, business, and functional levels)for example, the chief executive officer (CEO), the product managers, and the heads of functional areas. In addition, the team obtains input from company planning staffs, when they exist, and from lower-level managers and supervisors.
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The Strategy Makers


Because strategic decisions have a tremendous impact on a company and require large commitments of company resources, top managers must give final approval for strategic action.

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The Strategy Makers


Planning departments, often headed by a corporate vice president for planning, are common in large corporations. Medium-sized firms often employ at least one full-time staff member to spearhead strategic datacollection efforts. Even in small firms or less progressive larger firms, strategic planning is often spearheaded by an officer or by a group of officers designated as a planning committee.
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The Strategy Makers


Top management shoulders broad responsibility for all the major elements of strategic planning and management. General managers at the business level typically have principal responsibilities for developing environmental analysis and forecasting, establishing business objectives, and developing business plans prepared by staff groups.
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The Strategy Makers


A firms president or CEO characteristically plays a dominant role in the strategic planning process. The CEOs principal duty is often defined as giving long-term direction to the firm, and the CEO is ultimately responsible for the firms success.

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The Strategy Makers


In implementing a companys strategy, the CEO must have an appreciation for the power and responsibility of the board, while retaining the power to lead the company with the guidance of informed directors.

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Techniques of Improving Decision Making


There are two techniques to develop this A complex technique that requires the An administrator advocates a plan, which is then issue: generation of a plan (thesis)who andtakes counter studied by an appointed individual on the plan (antithesis) that affect reasonable Devils Advocacy role of an adverse critic, examining the proposal but looking for inconsistencies, inaccuracies and conflicting course of action. Dialectic Enquiry irrelevancies. The strategic manager listen to the debate

The evaluation may be enclosed in a report, or a live between the advocates of the plan and confrontation conference may be set up between counter plan and then make judgement the administrator and the critic, with key decisionof which plan will lead to higher performance. makers as observers. Finally, the decision makers then accept, modify This exercise helps thecan strategic mangers in or re-develop the proposal. forming a new conceptualization of the

problem.
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Techniques of Improving Decision Making


Devils Advocacy

Expert Plan

Devils Advocacy

Devils Advocate Criticize

Final Plan
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Techniques of Improving Decision Making


Dialectic Enquiry

Expert Plan

Expert Plan

Dialectic Enquiry

Debate Analysis

Final Plan
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McKinsys 7 S Framework
Structure

Strategy Shared Values

Systems

Skills Staff
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Style

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McKinsys 7 S Framework
Strategy: Systematic action and allocation of resources to achieve organizational objectives. Structure: Organizational structure and authority/responsibility relationships. Systems: Procedures and processes such as information systems, manufacturing processes, budgeting and control process. Style: the way management behaves and collectively spends time to achieve organizational goals. Staff: The people in the enterprise and their socialization into the organizational culture. Shared values (superordinate goals): The values shared by the members in the organisation Skills: Distinctive capabilities of an enterprise.
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Process of Strategic Management


Step 1
VISION AND MISSION STATEMENT

Step 2

SCANNING ENVIRONMENT DEVELOPING STRATEGIC CHOICES

Step 3

Step 4

IMPLEMENTATION

Step 5

EVALUATION
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Role of Strategist
An efficient strategist play the following roles: The Forecaster - a person who sees the future. The Sculptor a person who carves a form out of raw material. He shapes the future of organization. The Diplomat a person who skilled in the art of maneuvering and manipulation. The Guru a person who gives personal spiritual guidance to his disciples. The Jail Buster a strategist shows employees how to escape from the captivity of boredom and fear thus unlocking their talent and energy.
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Model of Strategic Management

Strategic Intent

Vision Mission
Business definition

Strategy Formulation Environmental and Organizational appraisal


SWOT Analysis Corporate-level Strategies Business-level Strategies Strategic analysis and choice Strategic plan

Business model Objectives

Strategy Implementation Project Procedural Resource allocation Structural Behavioural Functional & Operational

Strategic Evaluation

Strategic Control
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Strategic Intent

Strategic Intent
Strategic intent is a high-level statement of the means by which your organization will achieve its vision. It is a statement of design for creating a desirable future (stated in present terms). A strategic intent is your company's vision of what it wants to achieve in the long term. Strategic intent refers to the purposes the organization strives for. They may be expressed in terms of a hierarchy of strategic intent. The framework within which firms operate, adopt a predetermined direction and attempt to achieve their goal is provided by a strategic intent.
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Strategic Intent
Strategic Intent

Vision

Mission

Priorities

Aims

Objectives

Decision Criteria

Strategic Initiatives

Strategies

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Strategic Intent
Defining a Mission Statement
Mission is a statement which defines the role that an organization plays in the society. Thompson (1977) defines mission as the essential purpose of the organization, concerning particularly why it is in existence, the nature of the businesses it is in and customers it seeks to satisfy. Hunger and Wheelen (1999) say that mission is the purpose of reason for organizations existence.
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Strategic Intent
Characteristics of Mission Statement
It should be feasible It should be precise It should be clear It should be motivating It should be distinctive it should be major component of strategy It should indicate how objectives are to be accomplished
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Strategic Intent
Defining a Vision statement
Vision articulates the position that a firm would like to attain in the distant future. Kotter (1990) defines it as description of something (an organization, a corporate culture, a business, a technology, an activity) in the future. El-Namaki (1992) considers it as a mental perception of the kind of environment an individual, or an organization, aspires to create within a broad time horizon and the underlying conditions for the actualization of this perception.
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Strategic Intent
Benefits of Vision Statement
Good visions are inspiring Vision represents discontinuity, a step function and a jump ahead so that the company knows what it is to be. Good vision help in creation of a common identity. Good visions are competitive, original, and unique Good vision foster risk taking and experimentation. Good vision foster long term thinking. Good vision fosters long term creativity.
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Business Definitions
Business may be defined as human activity directed towards producing or acquiring wealth through buying and selling goods.
-Lewis H. Haney

Business means any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture - Section 2(13) of the Indian Income Tax Act 1971
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Business Definitions
Nature of Business
Business is an essential economic activity Business is a human activity Business is a social process Business is a system

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Types of Business Activities


Business Industry
Analytical Enterprises Synthetic Enterprises Assembling Enterprises Trade

Commerce
Aid to Trade

Internal Trade

External Trade

Transport Banking

Wholesale

Retail

Import
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Export

Insurance
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Characteristics of Business
Exchange or Sale Creation of Utilities Social Institution Profit Motive Risk and Uncertainty Customer Satisfaction
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Business Goals
Goals describe desired future. There may be number of goals We measure goal to evaluate success of a business Goals are derived from mission statements Goals are task oriented Goals are short tem in nature Goals are challenging Goals must specify conditions necessary for its attainment
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Objectives of Business
Economic Objectives
Profit Growth

Social Objectives
Service to Society
Better product More employment Better environment Better living standards Fair wages Growth and promotion Employee partnership Human objectives

Service to Employees

National Objectives
Social justice Skill development Development of entrepreneurs Export development Prof. DEBASISH DUTTA/Strategic Law abidance
Management/MITCOM

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Strategic Management Model


Environmental Scanning Gathering Information External Opportunities and Threats
Natural Environment Resources & Climate Societal Environment General Forces

Strategy Formulation Developing Long Range Plans

Strategy Implementation Putting Strategy into Action

Evaluation & Control Monitoring Performance

Mission
Reason for Existence
Objectives

What results to accompli sh and by when

Strategies

Internal Strength & Weakness Structure Culture Resources

Plan to Achieve the mission and objectives

Policies
Broad guide lines for decision making
programs

Activities needed to achieve a plan

Budgets
Cost of the
programs
Procedures

Sequence

of steps needed to do the job


Prof. DEBASISH DUTTA/Strategic Management/MITCOM

Performance

Actual Results
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Internal Appraisal

Internal Environment s
Corporate Structure Corporate Culture Corporate Resources
Marketing Finance R&D Operations and logistics Human Resource Management Information Technology
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Internal Environment
Internal environment therefore, can be explained in terms of resources and behavior, strengths and weaknesses, synergist effects and competencies. These factors help in development of strategic advantage of the organization. And therefore a framework for development of strategic advantage can be made.
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Framework for Development of Strategic Advantage


Strategic Advantage

Organizational Capability

Competencies

Synergistic Effects

Strength and Weakness

Organizational Resources

Prof. DEBASISH DUTTA/Strategic Management/MITCOM

Organizational Behavior
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Factors Affecting Organizational Capabilities


Financial capability
Sources, usages and management of funds

Marketing capability
Product, price, place, promotion and integrative & systematic factors

Operational capability
Production, operation & control and R&D systems

Human resource or personnel capability


HR or personnel system, organizational & employee characteristics and industrial relations

Information management capability


Factors related to acquisition and retention, processing and synthesizing, retrieval and usages, and integration of information

General management capability


General management system, general managers, external relationships, and organizational climate.
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Organizational Appraisal
It is also known as internal appraisal or company appraisal. It is essential as internal strength and weaknesses need to be associated with external threats and opportunities.

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Organizational Appraisal
Factors affecting organizational appraisal:
The ability of the strategist The size of the organization The internal environment including political forces and power game, and consistency in management team
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Organizational Appraisal
Approaches to organizational appraisal:
Approaches to organizational appraisal may be highly systematic or an ad hoc one. Systematic approach is usually used when strategist approach for formal strategic planning system. An ad hoc measure is used in response to a crisis. Organization uses both systematic as well as ad hoc system to appraise their internal environment.
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Organizational Appraisal
Sources of information for organizational appraisal:
Internal sources
Employee opinion Company files Financial statements Management information systems Similar organization Company reports of other organizations Trade journals Magazines
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External sources

Methods of Organizational Appraisal


SWOT Analysis
SWOT stands for Strength, Weaknesses, Opportunities and Threats There are four types of strategies:

Strengths-Opportunities (SO)
Weaknesses-Opportunities (WO) Strengths-Threats (ST) Weaknesses-Threats (WT)
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SWOT Analysis
SO Strategies

Strengths Weaknesses Opportunities Threats SWOT


SO Strategies

Use a firms internal strengths to take advantage of external opportunities

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SWOT Analysis
WO Strategies

Strengths Weaknesses Opportunities Threats SWOT


WO Strategies

Improving internal weaknesses by taking advantage of external opportunities

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SWOT H Analysis
ST Strategies

Strengths Weaknesses Opportunities Threats SWOT


ST Strategies

Use a firms strengths to avoid or reduce the impact of external threats

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SWOT Analysis
WT Strategies
Defensive tactics aimed at reducing internal weaknesses & avoiding environmental threats

Strengths Weaknesses Opportunities Threats SWOT


WT Strategies

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SWOT Analysis
SWOT Matrix
Strengths S
Leave Blank Opportunities O
List Opportunities List Strengths

Weaknesses W
List Weaknesses

SO Strategies
Use strengths to take advantage of opportunities

WO Strategies
Overcoming weaknesses by taking advantage of opportunities

Threats T
List Threats

ST Strategies
Use strengths to avoid threats Prof. DEBASISH DUTTA/Strategic
Management/MITCOM

WT Strategies
Minimize weaknesses and avoid threats

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Value Chain Analysis rainin


Value Chain Analysis is one of the technique that are useful in understanding and analyzing both interorganization and interorganization processes in order to identify sources of competitive advantage

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Value Chain Analysis


The Value Chain approach was developed in 1985 by MICHAEL PORTER. in Competitive Advantage Highlights cost advantages and distinctive capabilities-the value processes
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Value Chain Analysis for Assessing Competitive Advantage


End Use Customers Pays for Profit Margin Throughout the Value Chain
Supplier

value chain

R&D
Procur ement

Firm value chain


Distribu tion

Design

Prodn
value chain Buyer value chain

Techno logy

Mktg

Human Resour ces

Distri
Infrastr ucture Service
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Disposal

value chain

Value Chain Analysis


Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Porter suggested that the activities of a business could be grouped under two headings:
Primary Activities - those that are directly concerned with creating and delivering a product (e.g. component assembly) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities.

Value Chain Analysis is one way of identifying which activities are best undertaken by a business and which are best provided by others ("out sourced").
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Value Chain Analysis io


Linking Value Chain Analysis to Competitive Advantage
What activities a business undertakes is directly linked to achieving competitive advantage. For example, a business which wishes to outperform its competitors through differentiating itself through higher quality will have to perform its value chain activities better than the opposition. By contrast, a strategy based on seeking cost leadership will require a reduction in the costs associated with the value chain activities, or a reduction in the total amount of resources used.
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Value Chain Analysis Ess


these Inbound Logistics: the receiving and The goal of activities is to offer the warehousing The infrastructure of the firm: organizational of raw materials, and their customer a level of value that exceeds the structure, control systems, company culture, distribution to manufacturing as they arecost etc. thereby resulting in a profit required. of the activities, Human resource management : employee : the processes of transforming margin. Operations recruiting, hiring, training, development, and inputs into finished products and services. compensation. Outbound Logistics: the warehousing and Primary Activities distribution Technology of development : technologies to finished goods. Support Activities support value-creating activities. Marketing & Sales: the identification of
customer Procurement : purchasing inputs such needs and the generation ofas sales. materials, supplies, equipment. Service : the support and of customers after the products . and services are sold to them.
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Value Chain Analysis


Firm Infrastructure
Support Activities
(General management, accounting, finance, strategic planning)

Human Resource Management


(Recruiting, training, development)

Technology Development
(R&D, Product and process improvement)

Procurement
(Purchasing of raw material, machines, supplies)

Profit Margin

Inbound Logistics
(Raw material
handling and warehousing)

Operations
(Machining, assembling, testing)

Outbound Logistics
(Warehousing and distribution of finished product)

Marketing and Sales


(Advertising, promotion, pricing, channel relations)

Service
(Installation, repair, parts)

Primary Activities Prof. DEBASISH DUTTA/Strategic


Management/MITCOM

68

Quantitative Analysis
The technique involves using financial figures This method used when it not possible and non financial figure to measure the Evaluation ofis performance isis carried out in to express in monetary various functional with in organization strength and weaknesses ofareas theterms. organization. Non financial are mainly It may be any quantifications or more of the following Quantitative analysis can be stated in: done for the following: Financial Ratio Goodwill Assessment of profitability, liquidity, and Financial analysis Employee morale leverage of the organization.

Attrition and absenteeism Economic Value Added Analysis(EVA) Market Activity ranking Based Cost Analysis (ABC) Non-financial analysis Production cycle time etc.

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Qualitative Analysis
Qualitative analysis is used to cover the limitations of quantitative analysis, which is based on figures only There are many strengths and weaknesses of an organization which cannot be expressed in quantitative terms

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Comparative Analysis
Comparative analysis is the basis of assessment of strength and weaknesses of an organization It helps in comparing strength and weaknesses and other competencies of an organization to that of its competitors It can be done in the following ways:
Historical analysis Industry norms Benchmarking
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Historical Analysis
It is a measure of assessing how well an organization has progressed with respect to its own past performance. It is judged by the comparative figures like balance sheet, profit and loss account and other financial ratios and non-financial figures. Figures that pose consistently good over a period of time are indicator of strengths and those pose consistently bad over a period of time are indicators of weaknesses.
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Industry Norms
It is a comparison with the rival organization to know about the strength and weaknesses of the organization Various parameters can be considered such as:
Cost structure Advertisement Budget

Limitations
Erroneous conclusions Industry norms are aggregated figure of several organization but comparison is done only with similar organization Difficult obtain the actual industry norms as companies close guard its annual reports
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Benchmarking
It helps us to find out the best performer in an area so that performance of our organization can be compared with that organization. Benchmarking is the practice of being humble enough to admit that someone else is better at something and being wise enough to learn how to match and even surpass them at it.
American Productivity and Quality Center
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Benchmarking
Types of Benchmarking This compares the performance of one
Competitive benchmarking Functional benchmarking Generic benchmarking
This analysis is helps to compare the long benchmarking This analysis isdecisions used to of compare the organization with that another and out Performance term strategic actions carried analysis is helps to compare the units methods and practices followed to perform confirm how good one organization is This This analysis is a comparison made bydepartment other organization to attain their Process benchmarking or within the same processes with that of other organization comparing with other It involves the comparison processes or between the performance of our of our objectives with strategic decisions Much similar to competitive organization functions against non-competitive organization with the best competitors Strategic benchmarking organization benchmarking. it uses comparison of a organizations with in the same sector or process of an organization to the best Internal benchmarking technological process in any area other organization

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Comprehensive Analysis
It is a set of technique used to evaluate the strength and weaknesses of an organization. The techniques are: Balanced Scorecard Key Factor Rating Critical Success Factor

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Balanced Scorecard ors


At the highest level, the Balanced Scorecard is a framework that helps organizations translate strategy into operational objectives that drive both behavior and performance.

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Balanced Scorecard History

Measurement and Reporting


1992

Alignment and Communication


1996

Enterprise-wide Strategic Management


2000

Articles in Harvard Business Review:

Acceptance and Acclaim:

The Balanced Scorecard Measures that Drive Performance January - February 1992 Putting the Balanced Scorecard to Work September - October 1993 Using the Balanced Scorecard as a Strategic Management System January - February 1996 1996

The Balanced
Scorecard is translated into 18 languages

Selected by Harvard
Business Review as one of the most important management practices of the past 75 years.

2000
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Prof. DEBASISH DUTTA/Strategic Management/MITCOM

What is Balanced Scorecard


A new approach to strategic management was developed in the early 1990's by Drs. Robert Kaplan (Harvard Business School) and David Norton. They named this system the balanced scorecard The balanced scorecard is a management system that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results.
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What is Balanced Scorecard


The scorecard is a method of designing, organizing and communicating performance measures across multiple perspectives (i.e. customer, financial, business process and learning and growth), utilizing both short and long term time horizons. The scorecard conveys the strategic plan to organization members, and it monitors each perspective simultaneously so that each perspective continuously supports the strategic plan.
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What is Balanced Scorecard


Kaplan and Norton describe the innovation of the balanced scorecard as follows:
The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."
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The balanced scorecard suggests that we view the organization from FOUR perspectives.

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Benefits of Balanced Scorecard


Kaplan and Norton cite the following benefits of using the balanced scorecard:
Focusing the whole organization on the few key things needed to create breakthrough performance. Helping to integrate various corporate programs, such as quality, re-engineering, and customer service initiatives. Breaking down strategic measures to local levels so that unit managers, operators, and employees can see what's required at their level to roll into excellent performance overall.
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The Balanced Scorecard Is Based on an Understanding of the Basic Building Blocks of the Strategy
Financial Perspective
Revenue Strategy Return on Investment Productivity Strategy

1. The economic model of key levers driving financial performance

Sources of Growth

Sources of Productivity

Customer Perspective
Value Proposition
Price Quality Time Function Image Relatioship

2. The value proposition of target customers

Internal Process Perspective

Build the Brand

Make the Sale

Deliver the Product

Service Exceptionally

3. The value chain of core business processes

Learning & Growth Perspective


Staff Competencies

Technology Infrastructure

Climate for Action

4. The critical enablers of performance improvement, change and learning


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Prof. DEBASISH DUTTA/Strategic Management/MITCOM

We Use the Scorecard to Articulate Strategic Hypotheses in Cause-effect Terms


And Realize the Vision

Financial Results

To Drive Financial Success...


Needed to Deliver Unique Sets of Benefits to Customers...

Customer Benefits

Internal Capabilities

To Build the Strategic Capabilities..

Knowledge, Skills, Systems, and Tools


Prof. DEBASISH DUTTA/Strategic Management/MITCOM

Equip our People...


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BSC Terminology
Strategy Map: Diagram of the cause-and-effect relationships between strategic objectives
Strategic Theme: Operating Efficiency
Financial Profitability More customers

Statement of what strategy must achieve and whats critical to its success

How success in achieving the strategy will be measured and tracked

The level of performance or rate of improvement needed

Key action programs required to achieve objectives

Fewer planes Customer

Flight Is on time

Objectives
Lowest prices

Measurement

Target

Initiative

Fast ground
turnaround

On Ground Time On-Time


Departure

30 Minutes 90%

Cycle time
optimization

Internal Fast ground turnaround Learning Ground crew alignment

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Balanced Scorecard Example


Strategic Theme: Operating Efficiency
Financial Profitability Fewer Planes More Customers

Objectives

Measurement

Target

Initiative

Profitability More
Customers

Customer Flight Is on Time

Fewer planes Flight is on


time Lowest prices

Market Value Seat Revenue Plane Lease



Cost FAA On Time Arrival Rating Customer Ranking (Market Survey)

30% CAGR 20% CAGR 5% CAGR


#1 #1 Quality
management Customer loyalty program

Lowest Prices

Internal Fast Ground Turnaround

Fast ground
turnaround

On Ground Time 30 Minutes Cycle time On-Time 90% optimization


Departure program 70% yr. 3 90% yr. 5 100%

Learning Ground Crew Alignment

Ground crew
alignment

% Ground crew yr. 1


trained

% Ground crew
stockholders

ESOP Ground crew


training

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Some of the Indicators of Good Balanced Scorecard


1. Executive Involvement Strategic decision makers must validate and own the strategy and related measures

2. Cause-and-Effect Relationships
A good Balanced Scorecard will tell the story of your strategy in actionable terms. Every objective selected should be part of a chain of cause and effect linkages that represent the strategy

3. Balance between outcome and leading


measures There should be a balance of outcome measures and leading measures to facilitate anticipatory management 4. Financial Linkage Every objective can ultimately be related to financial results

5. Linkage of Initiatives and Measures: Each


Prof. DEBASISH DUTTA/Strategic Management/MITCOM

initiative should be based on a gap between baseline and target.


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Some Goals of the Balanced Scorecard

Provide a generic framework to translate strategy into operational terms Create a systems approach to form an integrated Strategic Management Process Provide a clear line of sight to the vision and strategy of the company Provide a tool for communicating the :

strategy, and
processes and systems required for implementing the strategy Draw a cause and effect roadmap to stakeholder value shareholder, customer, and employee.
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How Does the Scorecard Benefit Your Organization? Improves management effectiveness by having a shared and actionable view of the strategy

Optimizes and ensures strategic outcomes for a given set of resources


Enables employees to work in a coordinated, collaborative fashion towards organizational goals Speeds time to value through faster more informed decisionmaking on time and resource allocation Accelerates the approach, and its accuracy to the strategic destination
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Review/Summary
The Balanced Scorecard is a framework that helps organizations translate strategy into operational objectives that drive both behavior and performance

The Balanced Scorecard is based on the premise that measurement motivates


The scorecard is broken down into four perspectives that are linked The balanced organizations scorecard has benefits across

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Key Factors Rating


A comprehensive technique used in association with financial analysis. The strength and weaknesses are assessed and depends upon the rating based on number of key factors. These key factors are:
Financial capability factors Marketing capability factors Operations capability factors Personnel capability factors
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Critical Success Factor


Critical Success factors refers to the limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organization Various CSF for improving the performance are:
Money Consumers and distributors Consumer satisfaction Quality Product and service development Strategic relationship Employee attraction and retention Sustainability
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Porters Five Forces Model

Porters Five Forces Model


Porter identified five factors that act together to determine the nature of competition within an industry. These are the:
Threat of new entrants to a market Bargaining power of suppliers Bargaining power of customers (buyers) Threat of substitute products Degree of competitive rivalry
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Porters Five Forces Model


Threat of New Entrants

Bargaining Power of Suppliers

Rivalry within Industry

Bargaining Power of Buyers

Threat of Substitutes
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Porters Five Forces Model


Porter identified that high or low industry profits are associated with the following characteristics:
High Industry Profits associated with : Weak supplier Weak customer (buyers) High entry barriers Few opportunities for substitutes Little rivalry Low Industry profits associated with: Strong supplier Strong customers (buyers) Low entry barriers Many opportunities for substitutes Intense rivalry
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Threat of New Entrants to an Industry


If new entrants move into an industry they will gain market share & rivalry will intensify The position of existing firms is stronger if there are barriers to entering the market If barriers to entry are low then the threat of new entrants will be high, and vice versa Barriers to entry are, therefore, very important in determining the threat of new entrants. An industry can have one or more barriers.
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Threat of New Entrants to an Industry


The following are common examples of successful barriers:
Investment cost
High cost will deter entry High capital requirements might mean that only large businesses can compete

Economies of scale available to existing firms


Lower unit costs make it difficult for smaller newcomers to break into the market and compete effectively

Regulatory and legal restrictions


Each restriction can act as a barrier to entry (patent protection)

Product differentiation (including branding)


Existing products with strong USPs and/or brand increase customer loyalty and make it difficult for newcomers to gain market share

Access to suppliers and distribution channels


A lack of access will make it difficult for newcomers to enter the market

Retaliation by established products


Threat of price war will act to discourage new entrants
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Threat of NewGaining Entrants to an Industry


What makes an industry easy or difficult to enter?
Easy to Enter
Common technology Access to distribution channels Low capital requirements No need to have high capacity and output Absence of strong brands and customer loyalty Patented or proprietary know-how Well-established brands Restricted distribution channels High capital requirements Need to achieve economies of scale for acceptable unit costs
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Difficult to Enter

Bargaining Power of Suppliers


If a firms suppliers have bargaining power they will:
Exercise the power of bargaining Sell their products at a higher price Squeeze industry profits

If the supplier forces up the price paid for inputs, profits will be reduced. It follows that the more powerful the customer (buyer), the lower the price that can be achieved by buying from them.
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Bargaining Power of Suppliers


Suppliers find themselves in a powerful position when:
There are only a few large suppliers The resource they supply is scarce The cost of switching to an alternative supplier is high The product is easy to distinguish and loyal customers are reluctant to switch The supplier can threaten to integrate vertically The customer is small and unimportant There are no or few substitute resources available
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Bargaining Power of Suppliers


Factors that determine bargaining power of the suppliers:
Uniqueness of the input supplied
If the resource is essential to the buying firm and no close substitutes are available, suppliers are in a powerful position

Number and size of firms supplying the resources


A few large suppliers can exert more power over market prices that many smaller suppliers each with a small market share

Competition for the input from other industries


If there is great competition, the supplier will be in a stronger position

Cost of switching to alternative sources


A business may be locked in to using inputs from particular suppliers e.g. if certain components or raw materials are designed into their production processes. To change the supplier may mean changing a significant part of production
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Bargaining Power of Customers


Powerful customers are able to exert pressure to drive down prices, or increase the required quality for the same price, and therefore reduce profits in an industry.

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Bargaining Power of Customers


Several factors determine the bargaining power of customers, including:
Number of customers
The smaller the number of customers, the greater their power

Their size of their orders


The larger the volume, the greater the bargaining power of customers

Number of firms supplying the product


The smaller the number of alternative suppliers, the less opportunity customers have for shopping around

The threat of integrating backwards


If customers pose a threat of integrating backwards they will enjoy increased power

The cost of switching


Customers that are tied into using a suppliers products (e.g. key components) are less likely to switch because there would be costs involved
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Bargaining Power of Customers


Customers tend to enjoy strong bargaining power when:
There are only a few of them The customer purchases a significant proportion of output of an industry They possess a credible backward integration threat that is they threaten to buy the producing firm or its rivals They can choose from a wide range of supply firms They find it easy and inexpensive to switch to alternative suppliers
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Threat of Substitutes
A substitute product can be regarded as something that meets the same need Substitute products are produced in a different industry but crucially satisfy the same customer need. If there are many credible substitutes to a firms product, they will limit the price that can be charged and will reduce industry profits.
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Threat of Substitutes
The extent of the threat depends upon
The extent to which the price and performance of the substitute can match the industrys product The willingness of customers to switch Customer loyalty and switching costs

If there is a threat from a rival product the firm will have to improve the performance of their products by reducing costs and therefore prices and by differentiation.
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Rivalry within the Industry


If there is intense rivalry in an industry, it will encourage businesses to engage in
Price wars (competitive price reductions), Investment in innovation & new products Intensive promotion (sales promotion and higher spending on advertising)

All these activities are likely to increase costs and lower profits.
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Rivalry within the Industry


Several factors determine the degree of competitive rivalry; the main ones are:
Number of competitors in the market Competitive rivalry will be higher in an industry with many current and potential competitors Market size and growth prospects Competition is always most intense in stagnating markets Product differentiation and brand loyalty The greater the customer loyalty the less intense the competition The lower the degree of product differentiation the greater the intensity of price competition The power of buyers and the availability of substitutes If buyers are strong and/or if close substitutes are available, there will be more intense competitive rivalry Capacity utilisation The existence of spare capacity will increase the intensity of competition The cost structure of the industry Where fixed costs are a high percentage of costs then profits will be very dependent on volume As a result there will be intense competition over market shares Exit barriers If it is difficult or expensiveProf. to exit an industry, firms will remain thus adding to the DEBASISH DUTTA/Strategic 110 intensity of competition Management/MITCOM

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