Strategic Management Notes PDF

http://www.allonlinefree.com/1 STRATEGIC MANAGEMENT Notes Overview The greatest challenge for a successful organization is change. This threatening change may either be internal or external to the enterprise. The concept of strategy...

http://www.allonlinefree.com/1 STRATEGIC MANAGEMENT Notes Overview The greatest challenge for a successful organization is change. This threatening change may either be internal or external to the enterprise. The concept of strategy The concept of strategy in business has been borrowed from military science and sports where it implies out- maneuvering m the opponent. The term strategy began to be used in business co with increase in competition and complexity of business operations. e. A strategy is an administrative course of action designed to re achieve success in the face of difficulties. It is a plan for meeting ef challenges posed by the activities of competitors and in environmental forces. Strategy is the complex plan for bringing nl the organization from a given state to a desired position in a future period of time. For example, if management anticipates llo price-cut by competitors, it may decide upon a strategy of.a launching an advertising campaign to educate the customers w and to convince them of the superiority of its products. w Nature of strategy w  Strategy is a contingent plan as it is designed to meet the demands of a difficult situation.  Strategy provides direction in which human and physical resources will be deployed for achieving organizational goals in the face of environmental pressure and constraints.  Strategy relates an organization to its external environment. Strategic decisions are primarily concerned with expected trends in the market, changes in government policy, technological developments etc. http://www.allonlinefree.com/  http://www.allonlinefree.com/2  Strategy is an interpretative plan formulated to give meaning to other plans in the light of specific situations.  Strategy determines the direction in which the organization is going in relation to its environment. It is the process of defining intentions and allocating or matching resources to opportunities and needs, thus achieving a strategic fit between them. Business strategy is concerned with achieving competitive advantage.  The effective development and implementation of strategy depends on the strategic capability of the organization, which m will include the ability not only to formulate strategic goals but co also to develop and implement strategic plans through the process of strategic management. e.  A strategy gives direction to diverse activities, even though the re conditions under which the activities are carried out are rapidly ef changing. in  The strategy describes the way that the organization will pursue nl its goals, given the changing environment and the resource llo capabilities of the organization.  It provides an understanding of how the organization plans to.a compete. w  It is the determination and evaluation of alternatives available to w an organization in achieving its objectives and mission and the w selection of appropriate alternatives to be pursued.  It is the fundamental pattern of present and planned objectives, resource deployments, and interactions of a firm with markets, competitors and other environmental factors. A good strategy should specify;  What is to be accomplished  Where, i.e., which product/markets it will focus on http://www.allonlinefree.com/  http://www.allonlinefree.com/3  How i.e., which resources and activities will be allocated to each product/market to meet environmental opportunities and threats and to gain a competitive advantage Components of strategy 1. Scope; refers to the breadth of a firm’s strategic domain i.e., the number and types of industries, product lines, and markets it competes in competes in or plans to enter. 2. Goals and objectives; these specify desires such as volume growth, profit contribution or return on investment over a m specified period. co 3. Resource deployment; strategy should specify how resources are to be obtained and allocated across businesses, e. product/markets, financial departments, and activities.. re 4. Identification of a sustainable competitive advantage; it refers to ef examining the market opportunities in each business and product-market and the firm’s distinctive competencies or in nl strengths relative to competitors. 5. Synergy; this exists when the firm’s businesses, products, llo markets, resource deployments and competencies complement.a one another i.e., the whole becomes greater than the sum of its w parts( 2+2=5) w Strategies can be classified into corporate, business-unit and w functional strategies. Definition; Strategic management is the process by which top management determines the long-term direction of the organization by ensuring that careful formulation, implementation and continuous evaluation of strategy take place. The strategic management process The process can be broken down into three phases;  Strategy formulation http://www.allonlinefree.com/  http://www.allonlinefree.com/4  Strategy implementation  Strategy control Strategy formulation involves;  Defining the organization’s guiding philosophy & purpose or mission.  Establishing long-term objectives in order to achieve the mission.  Selecting the strategy to achieve the objectives. Strategy implementation involves; m  Establishing short-range objectives, budgets and functional co strategies to achieve the strategy. e. Strategy control involves the following;  Establishing standards of performance. re  Monitoring progress in executing the strategy. ef  Initiating corrective actions to ensure commitment to the in implementation of the strategy. nl Defining an organization’s purpose/mission llo  The mission defines the fundamental reason for the organization’s existence. It provides a framework for decision-.a making that gives direction for the entire organization. w  It is an overall goal of the organization that provides a sense of w direction and a guide to decision-making for all levels of w management i.e. organizational objectives and strategies at lower levels are developed from the mission.  The mission describes the organization’s line of business, its products and specifies the markets it serves within a time frame of 3 to 5 years.  The mission defines the boundaries or domain within which the organization will operate. The boundaries may be defined as industries or types of industries. http://www.allonlinefree.com/  http://www.allonlinefree.com/5  The mission should not prevent change but provides direction for seeking new opportunities.  It should be broad enough to allow exploitation of new opportunities but specific enough to provide direction.  A mission should be achievable, in writing and should have a time frame for achievement. Mission statements should include the following components;  Targets customers and markets  Principal products m  Geographic domain co  Core technologies used  Concern for survival, growth and profitability  Organizational self concept e. re  Desired public image. ef  The organization’s guiding philosophy in The organization’s philosophy establishes the values and beliefs nl of the organization about how the business should be done and llo the organization’s role in the society. It establishes the relationship between the organization and its.a stakeholders i.e. its responsibilities towards customers, w employees, shareholders and general public. w Establishing organizational objectives w An objective is a statement of what is to be achievable, measurable and stated with specific time frames. They can be classified as either short-range, medium or long range. They may also be corporate, business unit or functional/ departmental objectives. Organizational objectives may be in the following areas; 1. Profitability 2. Service to customers 3. Employee wellbeing and welfare 4. Social responsibility. http://www.allonlinefree.com/  http://www.allonlinefree.com/6 Strategic business units (SBUs) A large organization’s activities can be segmented as business units. A business unit is an operating unit in an organization that sells a distinct set of products to a distinct market in competition with a well defined set of competitors. It is normally referred to as an SBU. An organizational SBU often has the following characteristics;  It has its own set of customers. m  It should have a clear set of competitors, which it is trying to co surpass.  It should have its own strategic planning manager responsible e. for its success. re  Its performance must be measurable in terms of profit and loss, ef i.e. it must be a true profit centre. in e.g. K.B.C.’s SBUs include; K.B.C Kiswahili, K.B.C. English, Metro nl FM, K.B.C. T.V, Metro TV etc. llo.a Benefits of strategic management w  It provides the organization with consistency of action i.e. helps w ensure that all organizational units are working toward the same w objectives (direction).  The process forces managers to be more proactive and conscious of their environments i.e. to be future oriented.  It provides opportunity to involve different levels of management, encourage the commitment of participating managers and reducing resistance to proposed change. http://www.allonlinefree.com/  http://www.allonlinefree.com/7 m co e. re ef in nl llo.a w w w http://www.allonlinefree.com/  http://www.allonlinefree.com/8 m co e. re ef in nl ANALYZING THE EXTERNAL ENVIRONMENT llo In deciding an organization’s future direction, managers must.a answer three questions; w  What is the organization’s present position? w  Where does the management want the organization to be in w future? (objectives)  How does the organization move from its present position to the future desired position? The first question is answered through the analysis of the firm’s external and internal environment. The environment is a major source of change. Some firms become victims of this change while others use it to their advantage. http://www.allonlinefree.com/  http://www.allonlinefree.com/9 The purpose of environmental analysis is to enable the firm to turn change to its advantage by being proactive. Characteristics of the environment are;  It is unique to every organization.  It is constantly changing.  One level is controllable while the other (remote-PESTEL) is uncontrollable.  It is a source of Opportunities, Threats, Strengths & Weaknesses. Environmental analysis can be divided into two major steps; m a. Defining; determining the relevant environmental forces. co b. Scanning & forecasting; collecting information concerning the e. defined environment. Defining the external environment re External forces form the basis of the opportunities and threats ef that a firm faces. These are; in 1. Political /legal factors; They define the legal and regulatory nl framework within which firms must operate. Constraints are llo placed on firms through fair trade practices, minimum wage legislation, pollution and pricing policies aimed at protecting the.a employees, consumers, the general public and the environment. w Such actions reduce the profit potential of the firms. However, w others such as patent laws and government subsidies are w designed for the benefit and protection of firms. 2. Economic factors; They affect consumer spending power and consumption patterns. Managers must consider the general availability of finance, the level of disposable income and people’s consumption patterns. Other factors are; the level of interest rates, inflation rates, trend of growth in GDP, the emergency of trading blocs (EAC,ECOWAS) and levels of employment. http://www.allonlinefree.com/  http://www.allonlinefree.com/10 3. Social factors; These include the values, beliefs, attitudes and lifestyles of people. As people’s attitudes change, so does the demand for various types of products. Other examples of social change include;  Entry of large numbers of women in the labour market  Shifts in age distribution  Geographic shifts in population  Increased levels of education and sophistication 4. Technological factors; Technology refers to the means used to m do useful work. To avoid product obsolescence and promote co innovation, a firm must be aware of technological changes that e. influence its industry. Innovative technologies can lead to possibilities of a new product, product improvements or re improvement in production and marketing techniques. ef Environmental forecasting techniques in Environmental variables are dynamic and forecasting enables a nl firm to assess the future and make plans for it. llo Forecasting techniques can be classified as either qualitative or quantitative..a Qualitative techniques are based primarily on opinions and w judgements, on data that cannot be statistically analyzed. w Quantitative techniques are based on the analysis of data by use w of statistical techniques. Qualitative forecasting techniques 1. Delphi method; This is a method of developing a consensus of expert opinion. A panel of experts is chosen to study a particular problem. Panel members do not meet as a group. They are asked to give an opinion about certain future events. After the first round of opinions has been collected, the co-coordinator summarizes the opinions and sends the information to panel members. Based on this information, the panel members rethink http://www.allonlinefree.com/  http://www.allonlinefree.com/11 their earlier responses and make a second forecast. The same procedure continues until a consensus is reached. 2. Executive judgment; This is a method of forecasting based on the intuition of one or more executives. The approach may work well where the forecaster has past market experience. A major demerit is that the forecaster may be too pessimistic or optimistic. 3. Customer surveys; In this case customers are asked what types and quantities of products they intend to buy during a specified m period of time. But this may only be possible where the business co has few customers who may be able to make accurate estimates of future product requirements. The disadvantage is that a e. customer survey may only reflect customers’ purchase re intentions and not actual purchases. ef 4. Sales force forecasting survey; Sales people are asked to in estimate the anticipated sales in their territories for a specified nl period. Merits; llo  Sales people are closer to customers and are better placed to.a know the customers’ future product needs. w Demerits; w  The sales people can be too pessimistic or optimistic. w  They tend to underestimate the sales potential in their territories. Quantitative techniques 1. Time series analysis; This technique forecasts future demand based on what has happened in the past. The idea is to fit a trend line to historical data and then extrapolate this line into the future. The method assumes that historical data will form a similar pattern into the future. http://www.allonlinefree.com/  http://www.allonlinefree.com/12 2. Regression modelling; This is a forecasting technique in which an equation with one or more variables is used to predict another variable. The one being predicted is called the dependent variable and the other variables used to predict it are the independent variables. The technique determines how changes in the independent variables affect the dependent variable. Once a relationship is established, future values for the dependent variable can be forecast based on predicted values of the independent variables. m Industry and competitive analysis co This involves examining a firm’s industry and competitive environment. Factors considered are; e.  Industry structure re  Factors that determine competition ef  The key factors for success in an industry. in Competitive analysis helps to define the company’s distinctive nl competence and competitive advantage. llo A distinctive competence is an activity or resource where the firm’s position is superior to its rivals..a A competitive advantage refers to a firm’s superior competitive w position that allows it to achieve higher profitability than the w industry’s average. w Purpose of industry and competitive analysis  Defining a firm’s industry and served market. An industry is a group of companies that offer products that satisfy similar customer needs. A served market is the portion of the industry that the company targets.  Identifying business opportunities- i.e. new market trends and niches a firm can serve.  Providing a benchmark for evaluating the company relative to competitors. http://www.allonlinefree.com/  http://www.allonlinefree.com/13  Shortening the company’s response time to competitors’ moves or pre-empting such moves.  Helping a firm to gain a competitive advantage.  Aiding in the development of strategy and its successful implementation. Understanding the industry’s life cycle Industries come into existence and change over time due to technological, social and economic changes and managers need to understand these changes because they affect the intensity m and basis for competition. The stages of the industry’s life cycle co are as follows; 1. emerging (embryonic) stage e. At this stage companies offer products that have little re standardization because the technology is not well developed. ef Channels of distribution are not well established. Potential in customers and their buying habits are not known or are unclear. nl As some companies succeed, they attract new entrants as the industry’s sales rises. llo Strategies at this stage will be characterized by the following;.a  Ability to rapidly improve product quality and performance w features. w  Building advantageous relationships with key suppliers and w distribution channels.  Acquisition of a core group of loyal customers and the expansion of the customer base through model additions and advertising.  The ability to forecast future competitors and the strategies they are likely to take. 2. Growth stage Companies start to build their market share and profitability as industry sales expand. They are now able to standardize their http://www.allonlinefree.com/  http://www.allonlinefree.com/14 products and achieve economies of scale. Strategies are similar to those of stage one. 3. Shake out stage Industries often experience a shakeout which usually leads to the collapse and exit of a large percentage of companies in the industry. They rid the industry of small and unstable competitors leaving the larger firms. Shakeouts occur due to the following;  The saturation of the industry because of a large number of competitors and brands. m  A decline in the industry’s growth rate, reducing the industry’s co ability to support all existing competitors. 4. Maturity stage e. At this stage the industry product becomes more standardized re and success of the company mainly depends on aggressive ef marketing activities. Firms will have achieved economies of scale in in their operations and are likely to use low prices as their nl competitive tool. Because market growth is non-existent firms are motivated to acquire market share by taking it away from llo competitors. Strategies at this stage will include;.a  Pruning the product line- by dropping unprofitable product w models and sizes. w  Emphasis on process innovation that permits low cost w production.  Emphasis on cost reduction through putting pressure on suppliers for lower prices and using cheaper components.  Horizontal integration -acquiring or merging with other firms in similar business.  International expansion- to markets where attractive growth and limited competition still exists. 5. Decline stage http://www.allonlinefree.com/  http://www.allonlinefree.com/15 The stage is marked by declining industry sales. Such decline compels managers to reconsider the company’s objectives and determine whether it remains in the industry or exits. Characteristics of industry lifecycle  The stages vary in duration.  Different stages require different skills, capabilities and strategies.  Industry lifecycle is not always linear i.e. does not move sequentially from emerging to decline. An industry in maturity m may experience revival because of new technology or changes in co competitive strategies. Analyzing the structure of the industry e. Industry structure refers to the competitive profile/ analysis of re the industry. Some are more competitive than others and the ef degree of competitiveness depends on the following factors; in  Barriers to entry and exit  Level of product differentiation nl  Level of concentration llo  Economies of scale.a a. Barriers to entry and exit w They make it difficult for new firms to enter the industry and w existing ones to quit. When barriers to entry are high, w competition declines over time. These entry barriers may be tangible or intangible. Tangible barriers include;  Capital requirements e.g. aircraft manufacturing  Access to technological knowhow  Access to distribution channels  Extent of government control of the industry. Intangible barriers are;  Reputation of existing firms and brands http://www.allonlinefree.com/  http://www.allonlinefree.com/16  Customer loyalty to current brands  Customer switching costs Exit barriers may include the company’s physical assets which may lack a buyer and the effect of the departure from an industry on the company’s reputation. b. Product differentiation This refers to the extent to which customers perceive products or services offered by the companies in the industry as different from others. Differentiation can be achieved through m technological leadership, persuasive advertising, sales co promotions and after-sales service. c. Concentration e. It is the extent to which industry sales are dominated by only a re few firms. The intensity of competition declines over time if just ef a few firms are dominant. The firms that hold larger market in shares are able to achieve economies of scale and use them to nl set lower prices that act as a barrier to new entrants or drive out smaller companies from the industry. llo d. Economies of scale.a It refers to the savings that companies achieve from producing w large quantities. w Understanding competitive dynamics w Michael Porter’s five forces of competition can be used to gain an insight into an industry’s competitiveness. These are;  Threat of entry  Bargaining power of buyers  Bargaining power of suppliers  Threat of substitute products  Rivalry among existing companies. 1. Threat of entry This is mainly dependent on barriers to entry aforementioned. http://www.allonlinefree.com/  http://www.allonlinefree.com/17 2. Bargaining power of buyers In some industries, buyers can exert power to producers by forcing down prices, demanding higher quality or more after- sales service. This is dependent on the following;  The buyers are few and they buy in large volumes  The product is not differentiated, is substitutable and there are other alternative suppliers.  The buyer has little switching costs  The buyer can integrate backward to make the industry’s m product. co 3. Bargaining power of suppliers e. Suppliers can exert their bargaining power by raising prices or reducing the quality or quantity of their supplies. A supplier re group is powerful if; ef  It is made up of a few firms in  There are few or no substitute products nl  The product is unique or differentiated llo  There exists supplier switching costs  It can integrate forward to produce the industry’s product..a 4. Threat of substitutes w Substitutes are products that fulfil the same customer needs e.g. w cars, trains and airplanes are substitute means of transportation. w The threat is greater where there is little or no product differentiation and brand loyalty. 5. Rivalry among existing firms This is often based on tactics like price competition, new product introductions and heavy advertising. This rivalry is dependent on the following factors;  Competitors are many  They are roughly equal in size  Industry growth is slow, leading to fights for market share http://www.allonlinefree.com/  http://www.allonlinefree.com/18  The product lacks differentiation or switching costs  Fixed costs are high and the product is perishable  Exit barriers are high. Understanding the key success factors (KSFs) Key success factors determine the requirements for successful participation in an industry. The KSFs vary from one industry to another and vary from one phase of industry lifecycle to another. Identifying KSFs requires an analysis of customers and (analysis m of) the factors that lead to survival in the industry i.e. co competitive factors. Customer analysis involves the following;  Who are the customers? e.  What are their met and unmet needs (what do they want)? re  How do customers choose between competing products? ef Performing strategic group analysis in A strategic group is a set of companies within an industry that nl follow similar competitive strategies. llo Importance  Providing an overview of the major strategies used by.a companies in the industry and determining which strategies are w most effective. w  Helping the company to examine its direct competitors w  Helping the company to examine its potential competitors  Evaluating the company to explore different strategic options  Forcing the firm to reassess its market position.  Competitive benchmarking The process of competitor analysis A company can succeed only by designing offers/ products that satisfy target consumer needs better than competitors. This calls for competitor analysis. The process consists of the following steps; http://www.allonlinefree.com/  http://www.allonlinefree.com/19  Identifying key competitors  Assessing their objectives  Assessing their strengths and weaknesses  Assessing their strategies  Assessing their reaction patterns  Selecting which competitors to attack or avoid. 1. Identifying competitors A company can define its competitors as other companies offering a similar product/service to the same customer group at m similar prices. There are two ways of identifying competitors; co (a) Industry basis e. Many companies identify their competitors from the industry point of view. An industry is a group of firms which offer a re product or class of products that are close substitutes for each ef other, e.g. the banking industry, pharmaceutical industry etc. in (b) Market basis nl In this case competitors are companies that are trying to satisfy llo the same customer need or serve the same customer group. The market definition of competition opens the company’s focus to a.a broader set of actual and potential competitors e.g. from an w industry point of view coca cola might see its competitors as w Pepsi and other soft drink manufacturers. But from a market w perspective the customer actually wants to quench his thirst. This need can be satisfied by fruit juice, bottled water, beer etc. 2. Determining competitors’ objectives Companies differ on the weights they put on short term and long term profitability and other objectives. Some competitors might be oriented toward satisfying profits (breaking even) than maximizing the profits. The company should be able to know the relative importance that a competitor places on current profitability, market share, http://www.allonlinefree.com/  http://www.allonlinefree.com/20 share growth, cash flow, technological leadership etc. E.g. a company pursuing low cost leadership will react more strongly to a competitor’s cost-reducing manoeuvres than to the same competitor’s advertising increase. 3. Identifying competitors’ strategies In most industries, competitors can be sorted out into groups pursuing different strategies. A strategic group is a group of firms in an industry pursuing similar strategy. The company needs to examine each competitor on the following; m  Product quality co  Features and product mix  Customer service e.  Pricing policy re  Distribution coverage ef  Promotion strategy in  R & D effectiveness nl 4. Assessing competitors’ strengths/weaknesses The company needs to identify competitors’ resources and llo capabilities. Knowledge of such resources can be obtained.a through conducting primary research with customers, suppliers w and dealers. The company can carry out a customer analysis w process as follows; w  Assess the company’s and competitor’s performance on different customer values against their ranked importance.  Examine how customers in a specific segment rank the company’s performance against a specific major competitor on important attributes.  Monitor changes in customer value over time. 5. Estimating competitor’s reaction patterns Each competitor reacts differently. Some react to certain types of attacks but not to others i.e. they may respond strongly to http://www.allonlinefree.com/