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Module 1: Strategic Management

Overview: Five Topics
Above Average Returns
Competitive Advantage
I/O Model of Above-Average Returns (AAR)
Resource-Based Model of AAR
Strategic Vision and Mission
7- s Model
BCG matrix
PEST Model
Porters five force Model

What is Above Average Return
Returns more then the others earned within investor expects in
comparison to other investments with similar risk.

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What is Competitive Advantage
Ability of a firm to outperform
It is position of a company in a competitive
landscape that allows the company earning
return on investment higher
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Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)
Explains the external environments dominant
influence on a firm's strategic actions and
performance
Characteristics of and conditions present in the
external environment determine the
appropriateness of strategies that are
formulated and implemented in order for a firm
to earn above-average returns.
The choice of industry in which to compete has
more influence on firm performance than the
decisions made by managers inside the firm.
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Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)
4 Underlying Assumptions
External environment imposes pressures and constraints
that determine the strategies resulting in AAR
Most firms that compete within a particular industry:
Control similar strategically relevant resources
Pursue similar strategies in light of those resources
Resources for implementing strategies are highly mobile
across firms
Therefore any resource differences between firms will be
short-lived
Organizational decision makers are rational and committed
to acting in the firm's best interests, as shown by their
profit-maximizing behaviors
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Industrial
Organizational
(I/O) Model of
Above-
Average
Returns
(AAR)
Cont..
General Env.
Economical
Political
Legal
Technological

Competitor Env.
Industry Env.
Threats of new
entrance
Power of suppliers
Power of buyers
Product substitute
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Industrial Organizational (I/O) Model of
Above-Average Returns (AAR)
Limitations
Only two strategies are suggested:
Cost Leadership
Produce standardized products at costs below those of
competitors - be THE low-cost leader
Differentiation
Produce differentiated products that customers are willing
to pay a premium price for
Internal resources & capabilities are not considered
AAR are earned when a firm implements the
strategy dictated by external environment (general,
industry, and competitor)
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The Resource-Based Model of AAR
Basic Premise - a firm's unique resources &
capabilities is the basis for firm strategy and AAR
Each organization is a bundle of unique resources
and capabilities
Performance difference between firms emerge over
time due to these unique resources and capabilities
(versus industrys structural characteristics)
The uniqueness should define the firms strategic
actions
Resources are tangible and intangible
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The Resource-Based Model of AAR
Resources
Inputs into a firm's production process
Includes capital equipment, employee skills, patents,
high-quality managers, financial condition, etc.
Basis for competitive advantage: When resources are
valuable, rare, costly to imitate, and nonsubstitutable
categories of internal/firm-specific resources
Physical - things you can touch/feel = tangible
Human - people / employees

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The Resource-Based Model of AAR
Capability
Capacity for a set of resources to perform a task or
activity.
Core Competency
A firms resources and capabilities that serve as
sources of competitive advantage over its rival
Summary
A firm has superior performance because of
Unique resources and capabilities, and the combination
makes them different, and better, and get the competitive
advantage.

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The
Resource-
Based
Model of
AAR
7-s model
strategy
Super
ordinate
goals
structure
skills
staffs
system
style
7-s model
According to Waterman et al.. Organizational
change is not only a matter of structure
Organizational change is a complex
relationship between strategy, structure,
systems, staff, style, skills, and super ordinate
goals.
It is also known as the Mckinsey 7s Model.
Because of the inter connectedness of the
variables, it would be difficult to make
significant progress in one area without
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Cont
Without making progress in the others as
well.
There is no starting point or implied hierarchy
in the shape of the diagram
1) super ordinate goals: are the fundamental
ideas around which a business is built.
2)structure :- is the salient feature of the units
organizational chart
3)systems :- are the routine processes,
including how information moves around the
unit

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Cont..
Staff :- categories of personnel within the unit
Style :- how key managers behave in order to
achieve the units goals
Strategy :- direction of the company
Skills :- capabilities of key personnel and the
unit as a whole.
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7s model can be used in two ways
1) one can identify strength and weaknesses
of an organization
2)This model highlights how a change made
in any one of the Ss will have an impact on all
the others
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PEST Model
This model is framed for scanning of macro-
environmental factors.
It is useful strategic tool for understanding
market growth or decline, business position,
potential or not.
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PEST MODEL
PEST analysis stands for
Political
Economic
Social
Technological

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Political
Political:- political factors, are how and to
what degree a government intervenes in the
economy.
Specifically it includes tax policy, labor law,
environmental law, trade restriction etc.
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Economical
Economic factors include economic growth,
interest rate, exchange rate, inflation rate.

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Social
Social factors include the cultural aspect .
It include health consciousness, population
growth rate, age distribution etc.
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Technological
It includes rate of technological change,
outsourcing etc.
Affect to the cost and quality
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POLITICAL
PEST MODEL
ECONOMICAL
SOCIAL
TECHNOLOGICAL
Environmental factors:-
Includes weather, climate and climate change
Affect the industries such as tourism, farming
insurance
Legal factors:-
These factors affects how a company operate
For example: consumer law, antitrust law,
employment law and health and safety law
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BCG Matrix




High

Industrial
Growth rate

Low



High Low

Market share
STARS
Question
marks
Dogs Cash cow
BCG matrix Boston Consulting
Group
The BCG matrix was developed by the
Boston Consulting Group- a leading
management consulting firm.
The matrix was formed using industry growth
rate on the vertical axis relative market share
on the horizontal axis.
Industry growth rate:- rate of growth of
industry
Relative market share:- share of the
businesss market with compare to share held
by the largest rival company in the industry
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Cont
Market share measured in terms of quantity
of sale.
1) Question Marks or Problem Children:-
High industry growth low market share:
Rapid market growth makes such businesses
attractive from an industry stand point.
But there low relative share raises a question
about whether they can compete successfully
against larger and most cost-efficient rivals.
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Cont
Hence, BCG designated such business units
as question marks or problem child.
Question mark businesses are also cash
hog cash needs for such business are
high.
Strategic options suggested by BCG
1) aggressive invest-and-expand strategy
2)divestiture
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Cont.
2) stars
High industry growth rate high market share
It offers excellent profit and growth
opportunities .
Require large cash investments to expand
production facility and meet working capital
requirements.
Stars generate their own large internal cash
flows in view of,
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Cont.
Low cost advantage
Large scale economies
Production experience

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3) Cash Cows
Low industry growth high market share
Firm is making high profits even though the
industry grows at a slow pace
Cash Cow business unit describe as that units
which generate substantial cash surplus than
what it needs for reinvest and expansion.
This is due to the low industry growth rate and
less fresh investment opportunities
Surplus generated by cash cows may be used
to cover dividend payments investing in
emerging stars investing in problem children
that can be groomed as future stars
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4) Dogs
Low industry growth low market share
Both the industry as well as the firm
experiences low growth rate.
Therefore, BCG suggests that weak dog
businesses should be harvested, divested or
liquidated depending upon the ability of the
strategy to yield more cash.
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Porters five force Model
Michael Porters famous five forces of
competitive position model provides a simple
perspective for assessing and analyzing the
competitive strength and position of a
corporation or business organization
INDUSTRIAL
COMPETITION
Potential
Entrance
SUPPLIERS
SUBSTITUTES
BUYERS
Threat of New Entrance
Threat of SUBSTITUTE
Bargaining
power of
suppliers
Bargaining
power of
customers
Bargaining power of suppliers
The term supplier comprises all sources for
inputs that are needed in order to provide
goods or services
Supplier bargaining power is likely to be high
when:
The market is dominated by a few large
suppliers rather than a fragmented source of
supply
There are no substitute for the particular input
The switching costs from one supplier to
another are high
Bargaining power of customer
Determines how much customers can impose
pressure on margins and volumes.
Customers bargaining power is likely to be
high when
Customers could produce the product
themselves
The product is not of strategically importance
for the customer
The customer knows about the production
costs of the product
Threat of New Entrants
The threat of new entries will depend on the
extent to which there are barriers to entry.
These are,
High initial investments and fixed costs
Brand loyalty of customers
Scarcity of importance resources, e.g qualified
expert staff
Existing players have close customer relation
Threat of Substitute
A threat from substitute exists if there are
alternative products with lower prices of
better performance parameters for the same
purpose
The threats of substitute is determined by
following factors
Brand loyalty of customers
Close customer relationships
Current trends
Competitive Rivalry between existing
players
This force describes the intensity of
competition between existing players (
companies ) in an industry
Competition between existing players is likely
to be high when
There are many players of about the same
size
Players have similar strategies
There is not much differentiation between
players and their products