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 in product-market and the firm’s distinctive competencies or 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 defined environment. e. 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 influence its industry. Innovative technologies can lead to e. 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 period. nl 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. A distinctive competence is an activity or resource where the llo 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 Suppliers can exert their bargaining power by raising prices or e. 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 llo The company needs to identify competitors’ resources and 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/  http://www.allonlinefree.com/21 price decreases but may not respond at all to advertising increases. This depends on their profit and marketing objectives. 6. Selecting competitors to attack or avoid A company may benefit from some competitors. This may be in the following ways;  Competitors may help increase total demand  They share the costs of product and market development  They help to legitimize a new product/ technology  They may serve less attractive segments which may accuse the m company of ignoring the segments co Therefore some companies compete “constructively” while others may compete “destructively”. Companies will often e. attack competitors who are destructive, small, or weak. re ef in nl ANALYZING THE INTERNAL ENVIRONMENT llo The internal environmental analysis process evaluates all relevant factors within an organization in order to determine its.a strengths and weaknesses. w It starts with the identification of the organization’s resource w allocations, an enumeration of its strengths and their strategic w significance. Such analysis may be done by people from the planning department or an external consulting firm. Some of the areas most organizations should analyze include;  Financial position  Product/service position  Marketing capability  R & D capability  Organizational structure http://www.allonlinefree.com/  http://www.allonlinefree.com/22  Human resources  State of facilities and equipment  Past and current objectives, strategies and their effectiveness. Strengths have strategic significance when;  They result in a distinctive competency. A distinctive competency occurs when an organization’s cannot be easily matched by a competitor.  They provide a competitive advantage. A competitive advantage is the ability to do something that competitors cannot do or m cannot do as well. co  A weakness becomes a major vulnerability when it is a capability e. that is held by most competitors and is necessary for success in the industry. re Value chain analysis ef It is a way of looking at a business as a chain of activities that in transform inputs to outputs that customers value. nl It attempts to understand how a business creates customer llo value by examining the contributions of different activities within the business to that value;.a Inputs (raw materials, machinery) conversion w outputs (products, services) w Customer value is derived from the following; w  Activities that differentiate the product(quality)  Those that lower costs(affordability)  Activities that meet customers need quickly(speedy delivery) The analysis divides the activities of the firm into two groups; a) Primary activities: are those involved in the physical creation of the product, marketing and transfer of the product to the buyer and after sales service. b) Support activities: such as human resource, R & D, management etc. http://www.allonlinefree.com/  http://www.allonlinefree.com/23 The value chain analysis process a) Identify activities A firm often performs a number of activities that may represent a strength or weakness. These activities are such as;  Installation  Distribution  Promotion Any of these could be a source of competitive advantage. b) Allocate costs m Each activity incurs costs and managers should assign costs to co each of the activities and assess it on the basis of the customer value that it creates. e. c) Compare with competitors(competitor bench marking) re To evaluate a value activity as a strength or weakness, ef comparisons are made between it and key competitor’s in activities. Each element in the chain delivers a part of the total nl value to the customer and contributes part of the total profits. The purpose is to measure the value delivered and the profit llo contributed by each element to the chain. Strategy would be to.a focus attention and resources onto the parts of the chain from w which the majority of the value comes. w w IDENTIFYING STRATEGIC ALTERNATIVES Strategy outlines the steps an organization will take in order to achieve a set of objectives. Strategy is developed by evaluating available alternatives and choosing one or more of the alternatives. http://www.allonlinefree.com/  http://www.allonlinefree.com/24 Strategies exist at different levels of the organization and are classified according to the scope of their coverage. (a) Corporate strategies; they evaluate what business an organization will be in and how company resources will be allocated among those businesses. They are established at the highest levels of the organization and involve a long-range time horizon. (b) Business unit strategies; they focus on how a specific SBU will compete in a given industry. m (c) Functional strategies; are concerned co with the activities of different functional areas such as production, finance, marketing, etc. e. Corporate strategy alternatives re These can be classified as follows; ef A. Growth strategy in 1. Concentration strategy (intensive growth strategies) (a) Market development nl (b) Product development llo (c) Horizontal integration.a 2. Vertical integration w 3. Diversification growth w (a) Concentric diversification w (b) Conglomerate diversification B. Harvesting strategies C. Defensive strategies (a) Turnaround (b) Divestment (c) Liquidation (d) Bankruptcy D.Combination strategies A.Growth strategies http://www.allonlinefree.com/  http://www.allonlinefree.com/25 A firm pursuing a growth strategy regularly develops new products, enters new markets, finds new uses for its existing products and develops new production processes. Several generic strategies can be used for growth; 1. Concentration strategy; It is the strategy where the firm directs its resources to the profitable growth of a single product in a single market. The firm thoroughly develops its expertise in a limited area and grows by building its competencies and achieves a competitive edge. Actions available to the company m include the following; co  Stretching the product line (new sizes, styles, tastes, colours)  Expanding distribution into new geographic areas e.  Encouraging non-users to use the product re  Encouraging more usage ef  Penetrating competitor’s positions through pricing strategies, in product differentiation and advertising. nl There are three approaches to pursue a concentration strategy; llo a) Market development; This involves marketing present products to customers in related.a market segments by adding on channels of distribution. This is w achieved through the following; w  Opening additional geographic markets through regional or w international expansion  Attracting other market segments by developing product versions that appeal to other segments or by entering other channels of distribution. b) Product development This involves the modification of existing products or the creation of new but related products that can be marketed to current customers. Such a strategy is adopted to prolong the life-cycle of current products. The firm achieves this through http://www.allonlinefree.com/  http://www.allonlinefree.com/26 developing additional models and sizes or changing the products’ colour, shape, taste etc. c) Horizontal integration This involves growth through the acquisition of one or more firms producing a similar product or operating at the same stage of the production-marketing chain. The strategy is aimed at eliminating competition and providing the acquiring firm access to new markets and resources. 2. Vertical integration; It is where a firm acquires another firm that m supplies it with inputs (such as raw materials) or one that is a co customer for its output. E.g. EABL ltd acquired Central Glass Industries in a case of backward vertical integration. e. Forward integration moves an organization into distributing its re own products or services and gives the organization control over ef sales and distribution channels. in 3. Diversification; This is when an organization moves into areas that are clearly different from its current business to spread risk nl so that the organization is not subject to the whims of just one llo product or industry. Diversification can either be concentric or.a conglomerate. w  Concentric diversification w This involves the acquisition of businesses that are related to the w acquiring firm in terms of technology, markets or products. In this way the firm is able to build expertise in a related area and diversify risks.  Conglomerate diversification It is where a large firm acquires a business because it represents the most promising investment opportunity and not because of similarity or synergy. Growth strategies are achieved through acquisitions, mergers, or joint ventures http://www.allonlinefree.com/  http://www.allonlinefree.com/27 An acquisition occurs when one company purchases the assets of another and absorbs them into its own operations. A merger occurs when two or more companies combine into one. Neither party acquires the other but both companies merge together combining operations to form a new entity. A joint venture occurs when two or more organizations pool their resources for a given project. The two or more firms lack a necessary component for success in a particular competitive environment and by pooling resources together, they may be m capable of doing something they could not do separately and co are able to share risks and profits involved. B. Harvesting strategies e. Most products eventually reach a decline stage. This may be re because of new competition, changes in consumer preferences ef or new technology. When this happens a firm ‘harvests’ as much in as it can from the product, i.e. milking the cow dry. The approach is to limit additional investment and expenses and to nl maximize short-term profits and cash flow. Such a strategy llo should be considered under the following conditions;.a  The product is in the decline stage w  The current market share of the product is small w  The firm has other better uses for its resources w  The product is not a major contributor of the sales or profitability of the firm. C. Defensive / turnaround strategies These are used when the company needs to reduce its operations, to reverse a negative trend or to overcome a crisis or problem. The firm may be having financial problems or it forecasts hard times ahead in terms of new competitors entering the market, new products or changes in government regulations. The http://www.allonlinefree.com/  http://www.allonlinefree.com/28 strategies include retrenchment, divestment, liquidation and bankruptcy 1. Retrenchment/ restructuring/ downsizing A firm can find itself with declining profits because of recessions, production inefficiencies or innovative breakthroughs by competitors. Such a firm can survive if it fortifies its distinctive competencies. This is often achieved in two ways; -Cost reduction; e.g. laying off employees, leasing rather than purchasing new heavy equipment, eliminating elaborate m promotional activities and dropping unprofitable items from the co product line. -Asset reduction; e.g. the sale of land, buildings and equipment e. not essential to the basic activity of the firm. re 2. Divestiture ef Is the sale of a firm or a major component of a firm because the in company has financial needs where its cash flow can be greatly improved if business with high market value are sacrificed or nl because of government action when a firm is perceived to llo monopolize or unfairly dominate a particular industry..a 3. Liquidation w It is where a firm is sold in parts for its tangible asset value. As a w strategy, it minimizes the losses of all the firm’s shareholders. w The proceeds of the sale are then distributed to creditors, the remainder of which can then be distributed to shareholders. 4. Bankruptcy A company can go to the courts to ask for a reorganization bankruptcy. It persuades its creditors to temporarily freeze their claim while it undertakes to reorganize and build the company’s operations back to profitability. The company may close down unprofitable business divisions, reduce its workforce or negotiate employee contracts to affordable salary levels. http://www.allonlinefree.com/  http://www.allonlinefree.com/29 D.Combination Strategies: Joint ventures, Strategic alliances and Consortia 1. Joint venture This is where two or more firms lack a necessary component for success in a particular competitive environment and decide to enter a co-operative arrangement where they contribute in providing the resources required for a business venture. 2. Strategic alliances These are partnerships that exist for a definite period during m which partners contribute their skills and expertise to a co- co operative project. One partner may contribute manufacturing expertise while the other provides marketing skills. Often such e. alliances are undertaken because partners want to learn from re one another with the intention of building own capabilities to ef replace the partner when the contractual arrangement between in them ends. 3. Consortia nl These are large, interlocking relationships between businesses llo of an industry. Firms in one industry e.g. pharmaceutical or.a electronic may gang together to fund a research program. It w often results in cost-sharing and increased economies of scale w for the companies involved. w Business unit strategy alternatives Strategies at this level can be categorized into three major types;  Overall cost leadership  Differentiation  Focus 1. Overall cost leadership; This involves producing and delivering the product or service at a lower cost than the competition. Low cost producers maximize economies of scale and implement cost cutting technologies. They are then able to charge lower prices http://www.allonlinefree.com/  http://www.allonlinefree.com/30 or to enjoy higher profit margins. They depend on some unique capabilities to achieve and sustain their low cost position e.g. a) Having secured suppliers of scarce low materials b) Having a dominant market share position c) Having secured technology that cannot be copied. 2. Differentiation strategy; This requires that a company creates a product that is recognized as being unique, thus permitting the firm to charge higher than average prices. Differentiation can come in the form of a unique product attribute, better customer m service or an elaborate dealer network. It is aimed at building co customer brand loyalty and a resulting lower sensitivity to price. 3. Focus; It involves targeting a particular buyer group and serving e. the well defined but narrow market niche better than re competitors who serve a broader market. The idea is to achieve ef a least cost position or differentiation or both within a narrow in market. The product is tailored to the unique demands of the smaller segment. nl Global strategy llo Globalization refers to the strategy of approaching worldwide.a markets with standardized products. Multinational companies w (MNCs) are firms that compete in more than one national w market. w Reasons why firms internationalize/ globalize 1. Additional resources; Various inputs including natural resources, technologies, skilled personnel and materials may be obtained more readily outside the home country. 2. Lower costs; Costs including labour, materials etc. may be lower outside the home country. 3. Incentives; These may be available from the host country or home government to encourage foreign investment. http://www.allonlinefree.com/  http://www.allonlinefree.com/31 4. Taxes; Different corporate tax rates in different countries provide opportunities for firms to maximize their after-tax, worldwide profits. 5. Economies of scale; National markets may be too small to support efficient production. 6. Synergy; operations in more than one national environment provide opportunities to combine benefits from one location with another. 7. Protecting home market; through offense in the competitors’ m home i.e. a strong offense in a competitors market can put co pressure on the competitor that results in a pull back from foreign activities to protect itself at home. e. 8. Trade barriers e.g. tariffs, quotas and other restrictive trade re practices can make exports to foreign markets less attractive ef hence local operations in foreign markets become attractive. in 9. International competition; If a company’s competitors become international and the company wants to remain competitive, nl foreign operations become necessary. llo 10. Restrictions and regulations imposed.a by the home government may increase the cost of operating at w home and it may be possible to avoid these by establishing w foreign operations. w Characteristics of global industries  Barriers to entry decline and it becomes easier for foreign companies to penetrate national markets.  Industry concentration declines as a result of entry by foreign producers. Concentration refers to the amount of market share controlled by the top 1-4 producers in the industry. A low concentration ratio indicates a highly competitive industry.  Competition rises with internationalization and the diversity of competitors also increases. http://www.allonlinefree.com/  http://www.allonlinefree.com/32  Consumer buying power rises with increased internationalization because they have many new options from which to choose. International strategic choices Deciding whether to go abroad and engage in international operations requires a company to develop an international strategy that involves three steps; a. Determining the company’s preparedness for international operations m b. Deciding on the company’s mode of entry into different markets co c. Developing the organizational structure that supports the chosen strategy. e. A firm should not decide to go international because every re competitor is doing so but should first analyze the suitability of ef its structure, culture, people and resources for international in operations. nl Before making a decision to go international the company must weigh several risks; llo 1. The firm might not understand foreign customer preferences.a and fail to offer a competitively attractive product. w 2. The firm might not understand the foreign country’s business w culture. w 3. The firm might realize that it lacks managers with foreign experience. 4. The foreign country might change its laws or undergo a political revolution and expropriate foreign property (Zimbabwe). Foreign market entry methods These are;  exporting  licensing  franchising http://www.allonlinefree.com/  http://www.allonlinefree.com/33  joint ventures  foreign direct investments (FDI) Exporting; Most firms start with this so as to gain a foothold and necessary experience in the international market. It has the following advantages;  It offers the firm opportunity to learn and develop appropriate experience with international markets.  The firm is able to expand its market and diversify its risks against unfavourable domestic markets m  Enables the firm to achieve economies of scale because of co increased production volume  It does not require major initial capital investments. e. Licensing; Licensing is an arrangement where the licensor gives re something of value to the licensee in exchange for certain ef performance and payments from the licensee. The licensor may in give the licensee one or more of the following; nl  Patent rights e.g. rights to produce or sell a new invention for a llo certain number of years.  Copyrights, the exclusive legal right to reproduce, publish and.a sell a form of literary, musical or artistic work. w  Technical know-how. w The royalties/ fees generated from licensing are a major source w of revenue for the licensor. Licensing offers a company three major advantages:  It helps the company to overcome trade barriers without much cost or investment.  It allows the company to overcome limits or investments imposed by foreign governments.  No risks of expropriation. Disadvantages http://www.allonlinefree.com/  http://www.allonlinefree.com/34  The foreign partner may gain experience and evolve into a major competitor after the contract expires.  The licensor forfeits control on production and marketing of its products and this may lead to low quality products and poor service. Franchising; It is a special form of licensing which allows the franchisee to sell a product using the parent’s brand name or trade mark, carefully developed production procedures and marketing strategies. The franchisee pays a fee to the parent m company (franchisor) and must strictly adhere to the policies of co the parent. It offers a quick way of entering foreign markets. e. Joint ventures; This is entering foreign markets by joining with re foreign companies to produce or market a product. The process ef begins with a mutually agreeable pooling of capital, production in or marketing expertise, patents or trademarks. nl Advantages llo  Potentially greater returns from equity participation as opposed.a to royalties e.g. the company may control 50% of share capital w thus be entitled to 50% of the profits. w  Greater control over production and marketing. w  The firm gets greater experience in international business. Disadvantages  Need for greater capital outlay.  Interest of one partner may conflict with the other. Foreign Direct Manufacturing (FDI) This refers to direct ownership of foreign- based manufacturing facilities. This is appropriate under the following conditions;  The host country market is large  The host country market is geographically close http://www.allonlinefree.com/  http://www.allonlinefree.com/35  The company has good international experience  The company has significant competitive technological advantage. Advantages  Increased control over the firm’s foreign operations  Allows the company to exploit its competitive advantages in new markets  Enables the company to achieve economies of scale  It gives the company an opportunity to manufacture its products m locally and to include local needs and preferences co Disadvantages  It requires greater commitment of resources to international operations e. re  The company exposes a large investment to risks such as ef expropriation in  It creates problems for a firm that desires to divest from foreign nl operations llo Factors determining the mode of entry into international markets.a Two major factors should be considered. These are; w a. Environmental variables w b. Strategic variables w A.Environmental factors These are; country risk, location familiarity, demand conditions and competitive conditions, 1. Country risk. They include;  Political risks such as political instability  Ownership and control risks such as expropriation  Operational risks e.g. local price controls  Profit transfer risks which relate to exchange rate issues. http://www.allonlinefree.com/  http://www.allonlinefree.com/36 2. Location familiarity; a firm should understand the economic, social, technological and cultural values of their potential markets. 3. Demand conditions; if the market is uncertain because of declining demand or is in a recession, the firm should use a mode of entry with less commitment e.g. exporting 4. Competitive conditions; when competition is high the firm should use a mode of entry that requires limited source commitment. m B. Strategic variables co 1. Extent of economies of scale i.e. the potential for savings from increased volume of operations. FDI is better suited. e. 2. Concentration; it means that a few firms control most industry re sales. As concentration rises, the industry moves toward ef monopoly and success is achieved in such a scenario through in FDI. Generic international strategies nl 1. The multi domestic strategy llo It is premised on the belief that national markets differ in their.a structure, demographics, key success factors etc. this calls for w differentiation in the competitive strategies used in different w countries i.e. each country or regional market is treated w differently because there is need to customize products to meet the tastes of local consumers, establish distribution channels unique to every country, etc. Most global service companies tend to be multi-domestic e.g. insurance, banking, retailing etc. 2. Global strategy In this case the firm focuses on exploiting similarities among countries in order to create a competitive advantage. Competition crosses national borders and occurs on a worldwide http://www.allonlinefree.com/  http://www.allonlinefree.com/37 basis. The firm offers a standardized product to all its markets and engages in mass production and mass marketing. STRATEGY EVALUATION AND SELECTION To determine whether to make adjustments to the current strategy or change the strategy, it is necessary to project the results that will be achieved if no changes are made in the current strategy. When the current strategy is unlikely to achieve the objectives set for the planning period, a performance gap exists. m Gap analysis is a technique that identifies a firm’s current co objectives and determines whether the current strategy would achieve the objectives. The firm may have the objective of e.g. e. increasing sales by 10% over the next two years. It needs to re undertake a projection or forecast that will indicate whether the ef objective is realistic under the current strategy and prevailing in conditions. A resulting gap between target objectives and forecast actual nl performance indicates that the current strategy may not achieve llo target objectives..a The process of environmental analysis and internal analysis w provide the information for determining whether a gap may w occur. w The performance gap may be closed by careful implementation of the current strategy or more efficient use of resources or by improving competitive position for improved effectiveness. Portfolio analysis A technique that has been developed to assist in strategy evaluation and selection process is known as portfolio analysis. The Boston Consulting Group’s (BCG) Growth-Share Matrix and the Planning Grid are commonly used approaches in portfolio analysis. http://www.allonlinefree.com/  http://www.allonlinefree.com/38 The BCG Matrix The Growth share matrix postulates that all organizations are composed of more than one business. These businesses, also called strategic business units (SBUs) are called its corporate portfolio. The approach proposes that separate strategies be developed for each of these independent businesses. The BCG approach is a classification of a company’s businesses based on two variables; the business’ relative market share in its industry and the annual market growth rate of the industry in m which the business operates. co The relative market share refers to the SBU’s market share relative to that of its largest competitor in that industry. A e. relative market share(RMS) of 0.1 means that the company’s re sales volume is only 10% of the leader’s and an RMS of 10 means ef the company’s SBU is the leader and is 10 times that of the next in strongest competitor. The following steps are followed in using the growth-share nl matrix in strategy evaluation and selection; llo  Divide the company into its business units (SBUs).a  Determine the market growth rate for each business unit w  Determine the relative market share of each business unit w  Develop a graphical picture of the company’s overall portfolio of w business. The matrix is divided into four cells, each indicating a different type of business. 1. Question marks; Are businesses that operate in high growth markets but have low relative market share. They require a lot of cash because the company has to spend to keep up with the fast growing market because it wants to keep up with or overtake the market leader. Such a business is described as a question mark because the http://www.allonlinefree.com/  http://www.allonlinefree.com/39 company has to think hard about whether to continue putting money into this business. The SBU may also be known as a problem child. 2. Stars; Are the market leaders in a high growth market. A star does not necessarily produce positive cash flow because the company must spend to keep up with the high market growth and to fight off the competitors’ attacks. They are stars because they are promising future cash cows. m 3. Cash cows; co They are businesses operating in a market with falling market growth rate, have the largest relative market share and produce e. a lot of cash for the company. The firm does not have to finance re expansion because the market’s growth rate has slowed down. ef Due to the large market share, the business enjoys economies of in scale and a higher profit margin. The company uses cash-flows from the cash-cows to support other businesses. nl 4. Dogs; llo These are businesses with weak market shares in low growth.a markets. The company should consider harvesting these w businesses or holding them in the hope that conditions may w improve e.g. a turnaround in market growth rate. w Relative market share (RMS) and market growth rate are important parameters that influence strategy. RMS determines the rate at which the business generates cash i.e. a business with high market share should have higher profit margins and cash flows. On the other hand the market growth rate influences the ease of gaining market share and also determines the level of opportunity for investment. http://www.allonlinefree.com/  http://www.allonlinefree.com/40 After a portfolio analysis, a firm should decide whether its portfolio is healthy or not. An unbalanced portfolio would be one having too many dogs and question marks and too few cash cows and stars. The company should decide whether to build, hold, harvest or divest its SBUs. a. Build; Appropriate for question marks whose market shares must grow if they are to become stars and for stars if they are to become cash cows. m b. Hold; co It is appropriate for cash cows if they are to continue yielding large cash flows. e. c. Harvest; re It is a strategy to increase short-term cash flow regardless of ef long term effect. It involves milking the business dry and entails in eliminating unnecessary R&D expenditures, not replacing worn out equipment, reducing advertising expenditure, reducing the nl sales force etc. the strategy is appropriate for weak cash cows, llo dogs and question marks..a d. Divest; w Refers to liquidating or selling weak businesses and is w appropriate for dogs and question marks. w The planning grid (the GE model) The planning grid was developed by General Electric (GE). It plots each business unit on a nine cell grid. The horizontal axis is a qualitative analysis of the business unit’s strengths, while the vertical axis is a qualitative analysis of the industry attractiveness. It is based on the fact that a firm is successful in so far as it enters attractive markets and possesses the business strength to succeed in those markets. Market attractiveness is http://www.allonlinefree.com/  http://www.allonlinefree.com/41 rated as high, medium or low and business strength is rated as being strong, medium or weak. ------------ High -------------- Xxxxxxxxxx ----1------ ------2------ xxx3xxxxxx ------------ ------------- xxxxxxxxxx - xxxxxxxxxx xxxxxx ------------ Xxxxxxxxx Vvvvvvvvvv m ----4------ xxx5xxxxx vvv6vvvvvv ------------ xxxxxxxxx vvvvvvvv co Market/industry Medium attractiveness e. Xxxxxxx Vvvvvvvvv re Vvvvvvvvvv xx7xxxx vvv8vvvvv vvvvvvvvvv vvvvvvvvv vv9vvvvvvv ef xxxxxxx vvvvvv vvvvvvv xxx in strong medium weak nl Low llo.a Strong Medium w Weak w w Business strength (SBU) The following factors are considered to determine business strengths;  Market share held  Profitability  Competitive position  Growth rate of the business unit  Quality of management and employees http://www.allonlinefree.com/  http://www.allonlinefree.com/42  Product quality  Distribution and promotion effectiveness  R&D performance, etc. Market/industry attractiveness is judged on a number of factors i.e.  Market size  Market growth rate  Competitive intensity  Industry profitability m The nine cells of the GE matrix fall into three zones. The three co zones in the upper left corner (1, 2, & 4) indicate strong SBUs in e. which the firm should invest heavily and pursue growth strategies. The diagonal cells (3, 5, &7) indicate SBUs that are re medium in attractiveness. The firm should pursue growth or ef harvesting strategies in these SBUs. Cells 6, 8, & 9 indicate SBUs in that are low in attractiveness in which the company should nl divest or pursue defensive strategies (turnaround, divestiture, llo and liquidation). Shortcomings/ demerits/ critique of the portfolio models.a The portfolio techniques help managers to think more w strategically, understand the viability of their business better, w improve quality of their plans, eliminate weaker businesses and w strengthen their investment in more profitable businesses. But they both have the following limitations; 1. They may lead a firm to place too much emphasis on market share growth and entry into high growth businesses and neglect the current businesses. 2. The weights and ratings of a given business can be manipulated by management to produce a desired location in the matrix. http://www.allonlinefree.com/  http://www.allonlinefree.com/43 3. Many businesses may end up in the middle of the matrix as a result of averaging the ratings and this makes it hard to know which appropriate strategy to take for a specific SBU. 4. The models fail to show the synergies (shared experience or complementary effect) between the two or more businesses i.e. there is a danger of terminating a losing business unit that actually provides an essential core competence or added value to other business units (SBUs). 5. Two or more businesses can end up in the same cell while they m differ greatly in ratings on different factors e.g. co Business A business B e. Market share re50% 30% Product quality 60% 90% ef Promotion effectiveness 40% 30% in Total 150 150 Average 50% 50% nl llo SWOT analysis/ SWOT matrix.a It is an organization’s appraisal of its internal strengths and w weaknesses and its external opportunities and threats. w SWOT analysis is based on the assumption that an effective w strategy results from a sound “fit” between a firm’s internal resources and its external situation. An opportunity is a favourable situation in a firm’s environment e.g. identification of a previously overlooked market segment, favourable changes in regulatory circumstances, improved buyer purchasing power, technological changes. A threat is a major impediment to a firm’s current or desired position e.g. entrance of a new competitor, slow market growth, new unfavourable regulations. http://www.allonlinefree.com/  http://www.allonlinefree.com/44 A strength is a unique resource (distinctive competence) that gives a firm a competitive advantage in the market. A weakness is a limitation or deficiency in resources relative to competitors that impedes the firm’s effective performance. A SWOT analysis presents a company S, S,T in four possible scenarios; S O 2 1 W m W, W, co O T O T Cell 1 is the most favourable 3 4 situation where e. the firm faces several opportunities and has numerous strengths re to pursue those opportunities. ef In cell 2 the firm has identified key strengths but faces an in unfavourable environment. In this situation, strategy would be to redeploy the strong resources to build long term nl opportunities. llo A firm in cell 3 faces opportunities but is constrained by weak.a internal resources. The strategy would be to focus on w eliminating the weaknesses so as to pursue the opportunities. w Cell 4 is the least favourable and calls for strategies that reduce w or redirect involvement in products or markets (product elimination, market withdrawal). PIMS (profit impact of market strategy) The PIMs database maintained by the strategic planning institute consists of strategic data that includes financial data, information on customers, competitors, etc. The database is collected across industries offering different products and services in regional, national and international markets. The database offers client companies customized capabilities http://www.allonlinefree.com/  http://www.allonlinefree.com/45 regarding strategy evaluation and selection depending on their industry. Internal factors affecting strategy evaluation and selection 1. Role of the current strategy; Current strategies are often built on past strategies. If management has invested time and resources in the current strategy they would be more comfortable with a choice that is m closely related to and only involves a slight alteration of the co current strategy. 2. Degree of a firm’s external dependence; e. A firm may be dependent on one customer or one supplier and re this may mean the firm faces a strategic threat and may employ ef the strategies of vertical or horizontal integration. in 3. Attitude towards risk; Where attitudes favour risk, the range of strategic choices nl expands and high risk strategies become acceptable. But where llo management is risk-averse the range of strategic choices is.a limited and risky alternatives are eliminated before strategic w choices are made. w 4. Managerial priorities different from shareholder’s interest w Managers are required to make decisions that are in shareholders’ best interests but they frequently place their own interests above others e.g. where shareholders’ value may be maximized by selling a company, managers in the acquired firm may not select such a strategy for fear of losing their jobs. 5. Internal/ political considerations The use of power to pursue individual or group interests is common in organizations e.g. when the CEO who is a dominant http://www.allonlinefree.com/  http://www.allonlinefree.com/46 force and source of power, begins to favour a particular choice, it is often selected. 6. Competitive reaction In evaluating strategic choices, management has to weigh the likely competitor reactions e.g. the competitor may launch an aggressive counter- strategy and management must consider the impact of such reactions on the success of the chosen strategy. m co e. re ef in nl llo.a w w w http://www.allonlinefree.com/  http://www.allonlinefree.com/47 m co STRATEGY IMPLEMENTATION e. Strategy implementation involves translating formulated re strategies into action. It entails moving from “planning your ef work” to “working your plan”. Successful implementation of in strategy requires the following;  Strategies must be communicated and clearly defined for all nl affected employees. llo  All affected employees must receive management support.a through having an appropriate organizational structure, w empowering policies, sound leadership and effective reward w systems. w  Corporate and business-unit strategies must be translated into short-term objectives and functional strategies. 1. Communicating strategy A strategy has to be clearly understood before it can be implemented. This gives purpose to the activities of each employee and allows the employee to link whatever task is at hand to the overall organizational goal. http://www.allonlinefree.com/  http://www.allonlinefree.com/48 It also provides the employee with general guidance for making decisions and enables him/her to direct efforts towards activities that are important. 2. Strategy and structure Structure is the sum total of the ways in which the organization divides its labour into distinct tasks and then achieves coordination between them. The structure breaks up the company’s work into well defined jobs, assigns these jobs to departments and people and m coordinates these jobs by defining formal lines of authority and co communication. Types of organizational structures e. 1. Functional organizational structure re 2. Geographic ef 3. Divisional in 4. Strategic business unit 5. Matrix/Complex nl 1. Functional organizational structure llo It is where the organization units are defined by the nature of.a the work. Most organizations have four basic functions; w production, sales, finance and human resources. w Each of the functions may be broken down where necessary e.g. w the production department may be split into maintenance, quality control, engineering, manufacturing etc. Employees are grouped by function and report to managers in the same area of functional expertise, who report to the CEO. Such structure is often used in organizations with a similar or narrow product line. Advantages  Develops functional expertise  Enhances efficient use of resources through specialization  Centralized control of strategic decisions. http://www.allonlinefree.com/  http://www.allonlinefree.com/49 Disadvantages  Encourages narrow specialization when members of a functional group develop more loyalty to the functional group’s goals.  Conflict may develop among different departments striving for different goals  Limits the development of general managers  Decreases response time as the organization grows. 2. Geographic organizational structure It is found in organizations that maintain physically dispersed m and autonomous operations or offices. It is commonly used by co international organizations and those in the service industry e.g. banks, insurance companies, retailers, restaurant and hotel e. chains. re Advantages ef  Allows tailoring of strategy to the needs of each geographic in market. nl  Permits the use of local employees which creates customer llo goodwill and an awareness of local feelings and tastes.  Improves response time to the customer..a  Provides excellent training experience for general managers. w Disadvantages w  Makes it difficult to maintain consistency of service/ image from w area to area.  Can result in duplication of staff services at headquarters and regional levels.  Adds another layer of management.  Creates the dilemma of deciding how much autonomy to give to regional offices. 3. Divisional organizational structures(customer or product-based structures) http://www.allonlinefree.com/  http://www.allonlinefree.com/50 They are the structures adopted by organizations characterized by diversified products and unrelated customer groups. The different businesses (divisions) are broken down first, then followed by a traditional functional or geographic breakdown. Each division operates as an autonomous profit centre headed by a division manager. Organizations that have largely diversified products and customers use such a structure. Advantages  Authority is placed at the appropriate level for rapid response. m  Frees CEOs (top managers) to deal with corporate strategic co issues.  Provides a good training experience for strategic managers. e. Disadvantages re  Can result in costly duplication of staff functions at corporate ef and divisional levels. in  Can enhance negative divisional rivalry for corporate resources. nl  Creates the problem of deciding how much authority to delegate llo to divisional managers.  Creates the problem of how to equitably distribute corporate.a resources and overhead costs. w 4. Strategic business units w As the number, size and diversity of divisions or businesses w grow, some organizations find it advantageous to group the related businesses under senior managers, who then report directly to the CEO. The groups created are called strategic business units (SBUs). Advantages  Provides coordination among divisions with similar strategic concerns and product markets.  Directs accountability to distinct business units Disadvantages http://www.allonlinefree.com/  http://www.allonlinefree.com/51  Adds another layer of management  Can increase dysfunctional (negative) competition for corporate resources.  Can present difficulties in defining the roles and authority of the CEO, the SBU managers and divisional managers. 5. Matrix structure Also called “project” structure is a way of forming project teams within the traditional organization. A project is a combination of human, finance, raw material and machinery resources pooled m together in a temporary organization to achieve a specified co purpose. The development of a new product would be an example of a project. e. Employees working on a project are officially assigned to the re project and to their original department. A project manager is ef given the authority for meeting the project objectives in terms in of cost, quality, quantity and completion time. When the project nl work is done, the project team is dissolved and the functional personnel return to their departments. llo It may also be in the form of a combination of a functional and a.a product or market structure where employees are responsible w both to functional managers and to product or market w managers. w Advantages  Simultaneously accommodates several project- oriented business activities  Facilitates co-operation and coordination of related activities. ?