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Mission/Goal
Internal Analysis
GOAL
STRATEGY
Strategic Management
What is Management?
Strategic Management
What is Management?
Leading Controlling Planning Organizing
Strategic Management
What is Strategic?
What is Management?
Setting goals and objectives Allocation of scarce resources Orchestrating the behavior of organizational members Monitoring performance
Strategic Management
What is Strategic?
Important Critical Central Long Term
What is Management?
Setting goals and objectives Allocation of scarce resources Orchestrating the behavior of organizational members Monitoring performance
Important Terms
Strategic Management
Top level managers making proactive decisions regarding allocation of significant resources which will have a deciding influence on the long-term performance of the entire organization as compared to its competitors. Afterwards, orchestrating the entire organization in implementing the decision(s).
Important Terms
Strategy A firms theory about how to gain competitive advantage Unifying theme that gives coherence and direction to individual decisions of an organization.
STRATEGY
Strategic Leadership:
Intended STRATEGY
Strategic Leadership: Lever and resource allocation decisions Develop support among stakeholders
Nature of Strategy
Strategy leads to superior performance.
Clarity of direction Ability to recognize opportunities Ability to maneuver into a position of advantage
Purpose of a Firm
The purpose of a firm is to create value that meets the needs of its stakeholders. Stakeholders: All the parties that have a stake (interest) in the success of a firm.
Owners/Stockholders Employees Customers Suppliers Governments Local Communities Trade Associations Public at Large
Stakeholder Group
Society at Large
Trade Associations
Stock price appreciation and dividends Products and services Employment, wages, personal growth opportunities Revenue through sales, growth opportunities Jobs, economic development, civic involvement Economic health and security, environmental protection Political strength, operating funds
Profits
Accounting Profits
Net Income
Economic Profits/Economic Rents/Economic Value Added/Rents: Income that is surplus over and above the costs of all the inputs required for production.
real profits most comprehensive and accurate ultimate measure
Net Income = EVA +Cost of Equity Cost of Equity: Total return to a portfolio of stocks with similar risk. Proxies for EVA: ROA, ROE, Profit Margin.
Sources of Profits
Choice of industries/businesses ---> corporate strategy: scope of the firm in terms of industries and markets in which it competes. Position of advantage vis-a-vis competitive forces within a particular industry.
---> business/competitive strategy
What is Strategy?
Strategy answers the question How can the firm make money?
Industry Attractiveness Which industries should we be in?
Superior Profitability How do we make money? Positioning How Should we compete? Competitive Strategy
Corporate Strategy
Levels of Strategy
Corporate-Level Managers
Corporate Strategy
Two-Way Influence
Business-Level Managers
Business Strategies
Two-Way Influence
Functional Managers
Functional Strategies
Employees
Consistency is important
Consistency with the external environment Consistency with resources and capabilities Consistency with organization structure and systems Internal consistency
Strategic Analysis
Industry analysis Customer/marketplace trends Environmental forecast Competitor Analysis Assessment of internal resources, capabilities
Strategy Mission
Fundamental purpose Values
Objectives
Specific targets
External Assessment
Suppliers
Substitutes
Rival Firms
COMPANY
Buyer s
New Entrants
IMMEDIATE INDUSTRY AND COMPETITIVE ENVIRONMENT
General/Macro Environment
Industry Environment
External Assessment
The most difficult task to do yet the most significant factor affecting a companys success or failure.
Digital cameras to film Computers and printers to typewriters Singer
Global
Political/ Legal
Technological
Sociocultural
Industry Analysis
What determines the level of profits in an industry? Potential Profits = Value - Cost. Potential Profits are not equal to Actual profits. Profits earned by firms in an industry are determined by:
1. the value of products/services to customers. 2. the existence and strength of competitive forces (Porters Model).
Industry Analysis
1. Who are our customers? What do they want? How do they choose between competing suppliers?
The key to winning long-term customers is to understand their wants and needs and satisfy them better than competitors.
2. What are the forces driving competition? How intense is competition? How can a firm obtain superior competitive position?
Agenda
Sources of competition in the industry environment Key success factors of an industry Strategic groups Competitor appraisal Industry segments Competition at different stages of industry life cycle Turn in info sheets and list of team members on Thurs (Mar 8)
Buyers Buyers
What is Competition Like & How Strong Are the Competitive Forces?
Objective
To identify
How to Do It
Explain how each force acts to create competitive pressureWhat are the factors that cause each force to be strong or weak? Assess strength of each of the five competitive forces (Strong? Moderate? Weak? )
Rivalry among competitors Competition from substitute products Competitive threat from potential entrants Bargaining power of suppliers Bargaining power of buyers
Decide whether overall competition (the combined effect of all five competitive forces) is brutal, fierce, strong, normal/moderate, or weak
Examples
Coffee
vs. Tea vs. Coke Sugar vs. Artificial Sweeteners Plastic vs. Glass vs. Metal Newspapers vs. TV vs. Internet
Readily available
Attractively priced Believed to have comparable or better performance features Customer switching costs are low
Newcomers confront obstacles Economic factors put potential entrant at a disadvantage relative to incumbent firms
Effectiveness of entry barriers depends on the resources and strategies of new entrants.
Incumbents Newcomer
are unwilling or unable to contest a newcomers entry efforts can expect to earn attractive profits
Industry conditions that facilitate supplier power: small number of firms in suppliers industry
highly differentiated product lack of close substitutes for suppliers products supplier could integrate forward industry is an insignificant customer of supplier
Competitive Strategy
Supplying a product/service which customers are willing to pay a price that exceeds the cost of production.
Analysis of Competition
KSFs consist of a few really major determinants of financial and competitive success in an industry
Technologyrelated
Dunkin Donuts
Evaluate the strength of each one of the 5 forces Evaluate the overall attractiveness of this industry Identify KSFs
Competitor Analysis
Knowing ones competitors critical to effective strategic management. What does a firm need to know about its competitors?
Who are our competitors? What are their strategies? What are their objectives? What are their assumptions? What are their resources and capabilities?
Home PCs Video game consoles Online Video game sites Low (Coin-operated equipment)
MSN Gaming Zone, Pogo.com, America Online, HEAT, Engage, Oceanline, TEN
Competitor Analysis
Competitors current strategy Competitors objectives Competitors assumptions about the industry Competitors resources and capabilities
Regional
National
Multicountry
Global
based on Quality Service Technology superiority Breadth of product line Image & reputation More value for the money Other attributes
Segmentation Analysis
Industries are heterogeneous The nature and intensity of competition, as well as needs of customers and KSFs vary within industries. Assess the attractiveness of different segments in terms of profits.
New entrants Existing firms
Industrial Customers:
Size Geographic Location Industry Technology
Consumers
Demographic characteristics Psychographic characteristics
Products
Physical size Price level Features Technology/design Performance
4. Identify Segments KSFs 5. Analyze Advantages of Broad Vs. Narrow Segment Scope
improve service
process innovation
no dominant technology
commodity type products low barriers to entry few, if any, economies of scale
market leadership
niche harvest
divest
Agenda
Distinguish between resources and capabilities Define distinctive capabilities Discuss role of resources and capabilities in strategy formulation Identify the profit earning potential of resources and capabilities
Internal Assessment
Managers should not only focus on the external environment but also on the resources and capabilities of the firm. Objectives
Achieving strategic fit between the firms resources and capabilities and its strategy Ensuring that the firms resources are fully exploited Building the firms resource base
Tangible Resources
Financial Resources: > Main features: firms borrowing capacity and internal funds generation. > Key indicators: debt/equity ratio, credit rating Physical assets: > main features: size, location, technical sophistication, flexibility of plant, equipment, reserves of raw materials. > key indicators: resale values, year of manufacturing, alternative uses.
Intangible Resources
Reputation: > main features: brands, relationships w/ customers, suppliers, and others, reputation of reliability, quality, being socially responsible > key indicators: brand recognition, premium price, scope of reputation. Technological resources: > main features: stock of technology including proprietary tech (patents, copyrights, trade secrets). > key indicators: number of patents, revenue form patent licenses, R&D staff as a percentage of total employment.
Human Resources
Main Characteristics: training, expertise, skills, adaptability, motivation, commitment, loyalty, communicative and interactive abilities of employees. Key Indicators: educational, technical, and professional qualifications, wages and salaries.
Organizational Capabilities
Capability: A firms capacity to perform a particular activity. Managers should concentrate on the capabilities that the firm does particularly well relative to its competitors. Distinctive Capabilities / Competencies: Those activities that a firm does particularly well relative to competitors.
Example
Coca-Cola has a widely recognized logo and a distinctive red can with a trademarked white wave image that goes around the can. Coca-Cola also has well established set of reporting structures, reward systems, communications systems, and IT systems. These are intangible resources. Coca-Cola has access to substantial working capital (cash). This is a financial (tangible) resource. Coca-Cola has talented marketing professionals. These are individual human resources. Coca-Cola has the ability to put these various resources together in an effective marketing campaign. This is a capability.
Intel
Ability to design and manufacture ever more powerful microprocessors for PCs
Motorola
Defect-free manufacture (six-sigma quality) of cell phones
advantage!
Internal Audit
Every firm has certain functions that it must perform. Some common functions:
production/operations marketing R&D financial management/accounting HR management general management IS
Internal Audit
Involves a thorough assessment of each one of the functional areas.
Diagnostic questions
Results in identification of capabilities that the firm has developed in each area. Advantage:
Very flexible.
R&D
Are the firms products technologically competitive? Is communication between R&D and other units effective? Is development time form concept to actual product appropriate? How many products have been developed during the last year?
Financial/Accounting
Are the firms capital budgeting procedures effective? Has the firm established financial goals? Are they appropriate?
Marketing
Does the firm segment markets effectively? What is the firms market position? How is product quality, and how does it compare to competitors? Is customer service effective, and how does it compare to competitors? Is advertising strategy effective? Are customer complaints handled effectively and efficiently? Are present channels of distribution reliable and cost effective Are marketing planning and budgeting effective?
HR Management
Does the firm attract appropriate job applicants? Are employee selection procedures effective? Are organizational compensation and reward programs appropriate?
IS
Is information distributed effectively and efficiently? Is is it updated regularly? Is IS used by employees in making decisions?
Operations
Service
Profit Margin
Operations
How productive is the equipment compared to competitors? Are production control systems in place? How efficient and effective are they? Is the firm using appropriate level of automation?
Outbound Logistics
Are finished products delivered in a timely fashion to customers? Are they delivered efficiently? Are they warehoused efficiently?
Customer Service
How promptly and effectively are customer complaints handled? Are our product warranty and guarantee policies appropriate? How well does the firm provide replacement parts and repair services?
Procurement
Has the firm developed alternative sources for obtaining the resources? Are resources procured in a timely fashion? At lowest possible cost? At acceptable quality levels? Has the firm established sound long-term relationships with suppliers?
HR Management
How effective are the firms procedures for recruiting, selecting, and training? Are there appropriate promotion policies in place, are they used effectively? How appropriate are reward systems?
Firm Infrastructure
Does the strategic planning system facilitate and enhance the accomplishment of goals? Can we obtain low cost funds? Does IS provide timely and accurate information?
Sustainability of profits
Resources
Inputs to a firms production process
Capability
Integration of a team of resources
YES
A Non-Strategic capability/resource
Agenda
Define key terms
Business strategy Competitive advantage Competitive scope
Discuss Porters generic strategies View and discuss M. Porter on Competitive Strategy video series Discuss Best-Cost Strategy
ability
to
Competitive Scope: The breadth of target within which the firm seeks to gain a competitive advantage.
Broad scope Narrow scope
Market Target
Ivory Soap
Introduced as a differentiated product In 1950s positioned as the cost leader What are the requirements to pursue differentiation advantage? What are the requirements for cost leadership? How did Ivory develop a significant cost gap over its rivals?
La Quinta Inns
What are the requirements to be a successful focuser? How did La Quinta develop a significant cost gap over its rivals? What are the requirements for cost leadership? Pay attention to Lessons
Generic Strategies
Cost-Leadership / Low-Cost Strategy
A generic business strategy in which a business produces, at the lowest cost possible, no-frills products and services industry-wide for a large market
Cost
Ivory Today
Differentiation
Generic Strategies
Cost
La Quinta
Differentiation
Cost Leadership
Unique position What does it take to be the cost leader? Good product standard but acceptable quality appeals to large percentage of the market (broad cost leadership) Opening up significant and sustainable cost difference Command prices at or close to industry average
Approach 2
Redesign value chain to bypass some cost-producing activities
Low-Cost Characteristics
Cost conscious corporate culture Employee participation in cost-control efforts Ongoing efforts to benchmark costs
Effective Cost Leaders can MITIGATE the Five Forces to remain profitable
Can mitigate Supplier Power by: Low cost position makes them better able to absorb cost increases More likely to make very large purchases which reduces chance of supplier power
Can frighten off New Entrants due to the need to: Enter at Large Scale to be Cost Competitive Take time to move down the Learning Curve
Well positioned relative to Substitutes in order to: Lower prices to maintain value position
Driving prices far below competitors which may cause exit and shift power back to the firm
Effective Cost Leaders can also succeed IN SPITE of unattractive Five Forces
Powerful Suppliers can: Raise their Prices Lower their Quality LCL can absorb these COST increases better than others as long as the source of their cost advantage is not based on inputs.
Rivals
Cant absorb costs of price wars or marketing blitzes as well as the LCL.