BM422 Summary Notes L1-L5 PDF

LECTURE#1: INTRODUCTION TO STRATEGIC MANAGEMENT DIFFERENT STRATEGIC PERSPECTIVES ✓ Strategy involves looking into the future, not simply focusing on the present or extrapolating what has happened in the past. ✓ Strategy emphasizes asking pertinent question(s) as much as providing...

LECTURE#1: INTRODUCTION TO STRATEGIC MANAGEMENT DIFFERENT STRATEGIC PERSPECTIVES ✓ Strategy involves looking into the future, not simply focusing on the present or extrapolating what has happened in the past. ✓ Strategy emphasizes asking pertinent question(s) as much as providing the answers. ✓ Strategy is complex, dealing in highly intricate systems of cause and effect. ✓ Strategy integrates all the functional business activities – marketing, finance, human resource management, information systems – and gives them coherence. STRATEGY AND A STRATEGIC ORIENTATION look to the future aim for a balance between stability and flexibility ask new questions rather than answers old questions are holistic and integrative are complex are path-dependent are interactive 1|Page A BRIEF HISTORY OF STRATEGIC MANAGEMENT The history goes back to Greek and Chinese military thinkers, whose insights it has recently become fashionable to quote. In ancient Greek the term strategos means an army or its leader. A clear distinction is made between strategy and tactics; ✓ Tactics … [involve] the use of armed forces in the engagement, ✓ Strategy [is] the use of engagements for the object of war’ Strategy involves both the formulation of the overall aim as specific military objectives and the successful implementation of these objectives. The strategy needs to be efficiently implemented, which involves careful preparation, good training and the use of effective tactics. THE FOUR POSSIBLE GENERAL APPROACHES TO STRATEGIC MANAGEMENT 1: The Classical Approach: The traditional view of strategy making. It regards strategy making as rational analysis and emphasizes profit maximization as the only acceptable motivation for any strategy. Classical strategy combines the thinking of the military strategist with some aspects of the economist. The strategy is handed down by the leader, the strategist, to be implemented by the managers. 2. The Evolutionary approach: the view of the typical economist. The market operates rather like the process of natural selection in biology, removing those who fail to adjust successfully to a changing environment and leaving only that strategy which is best adapted to the changing economic environment. 3. The processual approach Strategy is defined by the nature of the strategy-making process rather than the particular content of any strategy. In this world strategy is usually a matter of incremental change, since nothing more is possible. 4. The Systemic Approach any strategy must fit its context whatever it is and be dictated by the culture, which varies by time and place. That context determines both what can be done and what is likely to be included in a strategy. DIFFERENT SCHOOLS OF STRATEGY MAKING 1: Strategy as Design A good strategy is designed to fit organizational capability with environmental opportunity. It is best summarized by the SWOT approach and has very close links with the case study approach pioneered by the Harvard Business School. 2: Strategy as Planning The strategy as plan is a detailed scheme for allocating resources to achieve the objectives specified according to a prescribed timetable. 3. Strategy as Positioning: Strategy is seen by this school as a matter of choosing an appropriate industry or sector to be in, finding the best market segments and focusing on the preferred value adding activities. 4. Strategy as entrepreneurship The strategist, seen by this school as the leader, usually the founder and chief executive officer, is concerned with closely controlling the enterprise in order to realize his or her vision. The leader is an innovator who often works by intuition or imagination to create something new. 2|Page 5. Strategy as the reflection of an organizational culture or social web Strategy is viewed as a social process; it is about integrating disparate elements of the ‘social web’ and finding common interests among those elements. About conserving what the enterprise already has and using its resources to its best ability. 6. Strategy as a political process Here the emphasis is on the exercise of power, whether within the enterprise or outside it, specifically as it relates to the making of strategy. The enterprise itself has to negotiate its way through strategic alliances, joint ventures and other network relationships in order to make a strategy. 7. Strategy as a learning process Strategy emerges from a process of discovery and learning. Strategic knowledge emerges gradually as the result of the interaction of a large number of strategists, possibly all the employees of an organization but certainly key individuals spread throughout that enterprise. 8. Strategy as an episodic or transformative process This school emphasizes for different situations the elements highlighted by other schools. It puts the stress on the same enterprise in different circumstances and its ability to handle the relevant transitions. In particular it analyses the quantum leaps from one situation to another, the so-called transformation situation. 9. Strategy as an expression of cognitive psychology This school concentrates on what goes on in the mind of the strategist, the mental or psychological processes involved in strategy making. 10. Strategy as consisting in rhetoric or a language game This school sees strategy as concerned with the way in which strategy is talked about, the kinds of conversations or discussions, both formal and informal, which take place in organizations making a strategy. It is about the language required to persuade employees to think strategically or to act to promote a particular strategy. 11. Strategy as a reactive adaptation to environmental circumstances Adaptation is the key to success and strategy is understood as comprising this adaptation. There is an element of this in all strategies. 12. Strategy as an expression of ethics or as moral philosophy This school sees the strategist as a moral agent, engaging in ethical conduct. The strategy embodies the values of the strategists. Strategy is as much about the reputation of the enterprise, particularly in the eyes of its stakeholders, as it is about profit. 13. Strategy as the systematic application of rationality This school sees an equivalence between strategy and its many elements and an attempt by a strategist to use the differing kinds of rationality. It interprets strategy as only qualifying as strategy if it is an attempt to apply reason to the organization of business activity. 14. Strategy as the use of simple rules This school interprets strategy in a highly practical way as the application of a limited number of simple rules derived from both general experience and the experience of particular industries. Through these rules, strategy enables enterprises to successfully seize opportunities in fast- moving markets and environments of rapid change when there is not enough time for following more elaborate procedures. 3|Page PHASES OF STRATEGIC MANAGEMENT THE VISION, MISSION AND OBJECTIVES 4|Page  LECTURE#2: THE STRATEGIC MANAGEMENT PROCESS WHAT IS STRATEGIC MANAGEMENT PROCESS? The strategic management process means defining the organization’s strategy. Is a process by which managers make a choice of a set of strategies for the organization that will enable it to achieve better performance. STRATEGIC MANAGEMENT PROCESS HAS THE FOLLOWING COMMON STEPS Step1: Setting up of Strategic Intent – where Vision, mission and objectives are established Step2: Strategy Formulation – Where Environmental and Organizational Appraisals are done Step3: Strategy Implementation – Where Activation of Strategy, Designing Structure, process and Systems are accomplished Step4: Strategy Evaluation & Control – Where Evaluation, Monitoring, reviewing and necessary corrective measures are undertaken. Benefits of Vision Mission and objectives ✓ Vision and mission statements spell out the context in which the organization operates and provides the employees with a tone that is to be followed in the organizational climate. ✓ The vision and mission statements help to translate the objectives of the organization into work structures and to assign tasks to the elements in the organization ✓ Finally, vision and mission statements provide a philosophy of existence to the employees, which is very crucial because as humans, we need meaning from the work we do. 5|Page  STEP 2: The Strategy Formulation The process of strategy formulation basically involves six main steps: 1. Setting Organizations’ objectives - The key component of any strategy statement is to set the long-term objectives of the organization. It is known that strategy is generally a medium for realization of organizational objectives. Objectives stress the state of being there whereas Strategy stresses upon the process of reaching there. 2. Evaluating the Organizational Environment - The next step is to evaluate the general economic and industrial environment in which the organization operates. This includes a review of the organizations competitive position. 3. Setting Quantitative Targets - In this step, an organization must practically fix the quantitative target values for some of the organizational objectives. 4. Aiming in context with the divisional plans - In this step, the contributions made by each department or division or product category within the organization is identified and accordingly strategic planning is done for each sub-unit. 5. Performance Analysis - Performance analysis includes discovering and analyzing the gap between the planned or desired performance. A critical evaluation of the organizations past performance, present condition and the desired future conditions must be done by the organization. 6. Choice of Strategy - The best course of action is actually chosen after considering organizational goals, organizational strengths, potential and limitations as well as the external opportunities. STEP3: STATEGY IMPLEMENTATION Excellently formulated strategies will fail if they are not properly implemented. Also, it is essential to note that strategy implementation is not possible unless there is stability between strategy and each organizational dimension such as organizational structure, reward structure, resource- allocation process, etc. 6|Page Step 4: Strategy Evaluation & Control Strategy Evaluation & Control is as significant as strategy formulation because it throws light on the efficiency and effectiveness of the comprehensive plans in achieving the desired results. Strategic Evaluation & Control is the final phase of strategic management. The process of Strategy Evaluation consists of following steps: 1. Fixing benchmark of performance - While fixing the benchmark, strategists encounter questions such as - what benchmarks to set, how to set them and how to express them. In order to determine the benchmark performance to be set, it is essential to discover the special requirements for performing the main task. The performance indicator that best identify and express the special requirements might then be determined to be used for evaluation. The organization can use both quantitative and qualitative criteria for comprehensive assessment of performance. 2. Measurement of performance - The standard performance is a bench mark with which the actual performance is to be compared. 3. Analysing Variance - The strategists must mention the degree of tolerance limits between which the variance between actual and standard performance may be accepted. 4. 4 Taking Corrective Action - Once the deviation in performance is identified, it is essential to plan for a corrective action. If the performance is consistently less than the desired performance, the strategists must carry a detailed analysis of the factors responsible for such performance. 7|Page 8|Page 9|Page  LECTURE#3: EVALUATING A FIRM’S EXTERNAL ENVIRONMENT WHAT IS EXTERNAL ENVIRONMENT? An external environment is composed of all the outside factors or influences that impact the operation of business. The business must act or react to keep up its flow of operations. The external environment can be broken down into two types: the micro environment and the macro environment. TYPES OF EXTERNAL ENVIRONMENT ✓ The micro environment consists of the factors that directly impact the operation of a company. ✓ The macro environment consists of general factors that a business typically has no control over. The success of the company depends on its ability to adapt. 10 | P a g e MICRO ENVIRONMENTAL FACTORS: These are the external factors close to the company that have a direct impact on the organizations process, they are; 1. Shareholders Any person or company that owns at least one share (a percentage of ownership) in a company is known as shareholders. A shareholder may also be referred to as a “stock holder”. As organisation requires greater inward investment for growth, they face increasing pressure to move from private ownership to public. 2. Suppliers An individual or an organization involved in the process of making product or service available for use or consumption by a consumer or business user is known as supplier.Prices may be forced up as a result. A closer supplier’s relationship is one way of ensuring competitive and quality products for an organization. 3. Distributors Entity that buys non-competing products or product – lines, warehouses them, and resells them to retailers or direct to the end users or customers is known as distributer. Getting products to the end customers can be a major issue for firms. You can also gain a competitive advantage by using changing distribution channels 4. Customers A person, company, or other entity which buys goods and services produced by another person, company, or other entity is known as customer. Organizations survive on the basis of meeting the needs, wants and providing benefits for their customers. Failure to do so will result in a failed business strategy. 5. Competitors A company in the same industry or a similar industry which offers a similar product or service is known as competitor. The presence of one or more competitors can reduce the prices of goods and services as the companies attempt to gain a larger market share. 6. Media Positive or adverse media attention on an organizations product or service can in some cases make or break an organization. 11 | P a g e MACRO ENVIRONMENTAL FACTORS (PEST) A firm may be influenced by changes within this element of its environment, but cannot itself influence the environment. The factors are: 1. Political Political Factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate. Some examples include: Tax policy, Employment Laws, Environmental regulations, Trade restrictions and tariffs, Political Stability. 2. Economic Economic factors affect the purchasing power of potential customers and the firm’s cost of capital. The following are examples of factors in the macro economy: Economic growth, Interest rates, Exchange rates and Inflation rate. 3.Social Social factors include the demographic and cultural aspects of the external macro environment. These factors affect customer needs and the size of potential markets. Some social factors are; Health consciousness, Population growth rate, Age distribution, Career attitudes and Emphasis on safety. 4.Technological Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions. Some technological factors include: Research & Development activity, Automation, Technology incentives and Rate of technology change. MICHAEL PORTER’S 5 FORCES MODEL Porter’s five forces model is one of the most complete business tools for analyzing the competitive environment where a company performs. Use the Porter’s five forces model to conduct an analysis of your industry and prepare the best strategy to lead the market. The five external forces considered in this framework are; 1. Degree of rivalry: The more intense the rivalry between existing firms within the industry, the more likely that prices are forced down by competitive pressure. A number of potential strategies are available to firms in order to reduce the rivalry, for example: Develop a differentiated product, acquire competitors via mergers and takeovers and Push to be a market leader. 2. Threat of new entrants: 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. 3. Threat of substitutes: A substitute product can be regarded as a similar product with similar specifications that meets the same purpose. For example, cars, buses and bikes are all substitutes for travel. Substitute products are produced in a different industry –but crucially satisfy the same customer need. The extent of the threat depends upon the extent to which the price and performance of the substitute can match the industry's product, as well as the willingness of customers to switch and customer loyalty and switching costs. 4. Bargaining power of buyers: The bargaining power of buyers analyses the control customers have over prices in a certain industry. For example, if there are multiple sellers with the same product, customers can easily switch to the cheapest option. On the other hand, products highly differentiated makes it harder for buyers to force changes in the existing price. 12 | P a g e 5. Bargaining power of suppliers: If a firm's suppliers have bargaining power they will: exercise that power, sell their products at a higher price and 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. 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 customer is small and unimportant ✓ there are no or few substitute resources available. 13 | P a g e 14 | P a g e  LECTURE#4: EVALUATING A FIRM’S INTERNAL CAPABILITY WHAT IS INTERNAL CAPABILITIES? Capabilities can be defined as the organization's ability to effectively make use of its resources. Capability-based strategies are based on the notion that internal resources and core competencies derived from distinctive capabilities provide the strategy platform that underlies a firm's long-term profitability. Evaluation of these capabilities begins with a company capability profile, which examines a company's strengths and weaknesses. THE RESOURCE-BASED VIEW (RESOURCES AND CAPABILITIES) Resources: tangible and intangible assets of a firm; ✓ tangible: factories, products ✓ intangible: reputation used to conceive of and implement strategies Capabilities: a subset of resources that enable a firm to take full advantage of other resources marketing skill, cooperative relationships. THE FOUR CATEGORIES OF RESOURCES 1. Financial (cash, retained earnings) 2. Physical (plant & equipment, geographic location) 3. Human (skills & abilities of individuals) 4. Organizational (reporting structures, relationships) THE TWO CRITICAL ASSUMPTIONS OF RESOURCED BASE VIEW (RBV) 1. Resource Heterogeneity Different firms may have different resources 2. Resource Immobility It may be costly for firms without certain resources to acquire or develop them. Some resources may not spread from firm to firm easily. If firm has resources that are valuable and one other firm don’t, and…if other firms can’t imitate these resources without incurring high costs, then…the firm possessing the valuable resources will likely gain a sustained competitive advantage. THE INTERNAL ANALYSIS TOOL The VRIO Framework entails the Four Important Question: Value Rarity Imitability Organization If a firm has resources that are; Valuable, Rare, and costly to Imitate, and the firm is organized to exploit these resources, then the firm can expect to enjoy a sustained competitive advantage. 15 | P a g e APPLYING THE VRIO FRAMEWORK TOOL A resource or bundle of resources is subjected to each question to determine the competitive implication of the resource. The Question of Value: ✓ in theory: Does the resource enable the firm to exploit an external opportunity or neutralize an external threat? ✓ the practical: Does the resource result in an increase in revenues, a decrease in costs, or some combination of the two? The Question of Rarity: if a resource is not rare, then perfect competition dynamics are likely to be observed (i.e., no competitive advantage, no above normal profits). A resource must be rare enough that perfect competition has not set in. Valuable and Rare: If a firm’s resources are: The firm can expect: Not Valuable Competitive Disadvantage Valuable, but Not Rare Competitive Parity Valuable and Rare Competitive Advantage (at least temporarily) The Question of Imitability: intangible resources are usually more costly to imitate than tangible resources. If there are high costs of imitation, then the firm may enjoy a period of sustained competitive advantage. A sustained competitive advantage will last only until a duplicate or substitute emerges. COSTS OF IMITATION ✓ Unique Historical Conditions (Caterpillar): - first mover advantages - path dependence ✓ Causal Ambiguity causal links between resources and competitive advantage may not be understood and bundles of resources fog these causal links. ✓ Social Complexity: The social relationships entailed in resources may be so complex that managers cannot really manage them or replicate them ✓ Patents: Patents may be a two-edged sword. Offer a period of protection if the firm is able to defend its patent rights. Required disclosure may actually decrease the cost of imitation, and the timing. 16 | P a g e  Value, Rarity, & Imitability If a firm’s resources are: The firm can expect: Valuable, Rare, but Temporary not Costly to Imitate Competitive Advantage Valuable, Rare, and Sustained Costly to Imitate Competitive Advantage (if Organized appropriately) The Question of Organization: A firm’s structure and control mechanisms must be aligned so as to give people ability and incentive to exploit the firm’s resources. Examples: formal and informal reporting structures, management controls, compensation policies, relationships, etc. these structure and control mechanisms complement other firm resources—taken together, they can help a firm achieve sustained competitive advantage. ✓ Imitation will seldom lead to competitive advantage - firms should use resources and capabilities to fill unique competitive space. ✓ Similar strategies may lead to competitive advantage - some firms can achieve competitive advantage even if they are second movers. 17 | P a g e 18 | P a g e  LECTURE#5: BUSINESS-LEVEL STRATEGY WHAT IS BUSINESS LEVEL STRATEGY? Goal-directed actions managers take to achieve competitive advantage in a single product market. “How will we compete to gain & sustain competitive advantage?” ✓ Who: which customer segments will we serve? ✓ What: customer needs, wishes, and desires will we satisfy? ✓ Why: do we want to satisfy them? ✓ How: will we satisfy our customers’ needs? 19 | P a g e 20 | P a g e 21 | P a g e 22 | P a g e OTHER BUSINESS LEVEL-STRATEGIES 1. Strategic Alliances and Partnerships A strategic alliance and partnership is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations. A strategic alliance will usually fall short of a legal partnership entity, agency, or corporate affiliate relationship. 2. Mergers and Acquisitions 3. Vertical Integration Vertical integration (VI) is a strategy that many companies use to gain control over their industry’s value chain. This strategy is one of the major considerations when developing corporate level strategy. The important question in corporate strategy is, whether the company should participate in one activity (one industry) or many activities (many industries) along the industry value chain. Two issues have to be considered before integration: ✓ Costs. An organization should vertically integrate when costs of making the product inside the company are lower than the costs of buying that product in the market. ✓ Scope of the firm. A firm should consider whether moving into new industries would not dilute its current competencies. 4. Outsourcing Outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company's own employees and staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure. 23 | P a g e 5. Offensive and Defensive Strategies ✓ Offensive strategy: An offensive competitive strategy is a type of corporate strategy that consists of actively trying to pursue changes within the industry. Companies that go on the offensive generally invest heavily in research and development (R&D) and technology in an effort to stay ahead of the competition. Offensive strategies directly target competitors from which they want to capture market share. ✓ Defensive strategies: Defensive strategy is defined as a marketing tool that helps companies to retain valuable customers that can be taken away by competitors. When rivalry exists, each company must protect its brand, growth expectations, and profitability to maintain a competitive advantage and adequate reputation among other brands 6. First-Mover Advantages and Disadvantages ✓ The advantages of first movers include time to develop economies of scale—cost-efficient ways of producing or delivering a product. ✓ The disadvantages of first movers include the risk of products being copied or improved upon by the competition. 24 | P a g e