Chapter

1
What Is Strategy and
Why Is It Important?

Dr.R.Nandagopal
Director
PSG Institute of Management
PSG College of Technology
1-1
“Without a strategy the
organization is like a ship
without a rudder.”
Joel Ross and Michael Kami
 Chapter Roadmap
◆ What Is Strategy?
➔ Identifying a Company’s Strategy
➔ Strategy and the Quest for Competitive Advantage
➔ Strategy Is Partly Proactive and Partly Reactive
➔ Strategy and Ethics: Passing the Test of Moral Scrutiny
◆ The Relationship Between a Company’s Strategy and Its
Business Model
◆ What Makes a Strategy a Winner?
◆ Why Are Crafting and Executing Strategy Important?

1-3
 Thinking Strategically:
The Three Big Strategic Questions
1. Where are we now?
2. Where do we want to go?
➔ Business(es) to be in and market positions to stake out
➔ Buyer needs and groups to serve
➔ Outcomes to achieve

3. How will we get there?

➔A company’s answer to “how
will we get there?” is its strategy
1-4
 What Is Strategy?
◆ Consists of the combination of competitive moves and
business approaches used by managers to run the company
◆ Management’s “game plan” to
➔ Attract and please customers
➔ Stake out a market position
➔ Compete successfully
➔ Grow the business
➔ Achieve targeted objectives

1-5
 The Hows That
Define a Firm's Strategy
◆ How to please customers

◆ How to respond to changing

market conditions Strategy
is HOW
◆ How to outcompete rivals to . . .

◆ How to grow the business

◆ How to manage each functional piece of the business and

develop needed organizational capabilities

◆ How to achieve strategic and financial objectives

1-6
 What Are a Company’s
Strategic Choices?
Strategic choices are based on . . .
◆ Trial-and-error organizational learning about

➔ What has worked and

➔ What has not worked

◆ Management’s appetite for taking risks

◆ Managerial analysis and strategic thinking about how best to

proceed, given prevailing circumstances
1-7
 Key Elements:
Southwest Airlines’ Strategy
◆ Grow the business by gradually adding more flights on existing
routes and initiating service to new airports
◆ Make friendly service a company trademark
◆ Maintain an aircraft fleet of only Boeing 737s
◆ Encourage customers to make reservations and purchase tickets at
the company’s Web site
◆ Avoid flying into congested airports
◆ Employ a point-to-point route system
◆ Economize on
➔ Amount of time it takes terminal personnel to check passengers
in and on-load passengers
➔ Costs
1-8
 Fig. 1.1: Identifying a Company’s Strategy

1-9
 Striving for
Competitive Advantage
◆ To achieve sustainable competitive advantage, a company’s
strategy usually must be aimed at either
➔ Providinga distinctive product or service or
➔ Developing competitive capabilities rivals can not match
◆ Achieving a sustainable competitive advantage greatly
enhances a company’s prospects for
➔ Winning in the marketplace and
➔ Realizing above-average profits

What separates a powerful strategy from an ordinary strategy

is management’s ability to forge a series of moves,
both in the marketplace and internally, that
produces sustainable competitive advantage!
1-10
 Strategic Approaches to
Building Competitive Advantage
◆ Strive to be the industry’s low-cost provider

◆ Outcompete rivals on a key differentiating feature

◆ Focus on a narrow market niche, doing a better job than

rivals of serving the unique needs of niche buyers

◆ Develop expertise, resource strengths, and capabilities not

easily imitated by rivals

1-11
 Examples: Strategies Based
on Distinctive Capabilities
◆ Sophisticated distribution systems – Wal-Mart

◆ Product innovation capabilities – 3M Corporation

◆ Complex technological process – Michelin

◆ Defect-free manufacturing – Toyota and Honda

◆ Specialized marketing and merchandising know-how – Coca-

Cola
◆ Global sales and distribution capability – Black & Decker

◆ Superior e-commerce capabilities – Dell Computer

◆ Personalized customer service – Ritz Carlton hotels

1-12
 Fig. 1.2: A Company’s Strategy Is
Partly Proactive and Partly Reactive

1-13
 Why Do Strategies Evolve?
◆ A company’s strategy is a work in progress

◆ Changes may be necessary to react to

➔ Fresh moves of competitors

➔ Evolving customer preferences

➔ Technological breakthroughs

➔ Shifting market conditions

➔ Crisis situations
1-14
 Crafting Strategy Is an
Exercise in Entrepreneurship
◆ Strategy-making is a market-driven activity that involves
➔ Studying market trends and competitors’ actions
➔ Keen observation of customer needs
➔ Scrutinizing business possibilities based on new technologies
➔ Building firm’s market position via acquisitions or new product
introductions
➔ Pursuing ways to strengthen firm’s competitive capabilities
➔ Proactively searching out opportunities to
◼ Do new things or
◼ Do existing things in new or better ways

1-15
 Linking Strategy With Ethics
◆ Ethical and moral standards go beyond

➔ Prohibitions of law and the language of “thou shalt not”

to issues of
➔ Duty and “right” vs. “wrong”
◆ Ethical and moral standards address
“What is the right thing to do?”
◆ Two criteria of an ethical strategy:
➔ Does not entail actions and behaviors that cross the line from “can
do” to “should not do’ and “unsavory” or “shady” and
➔ Allows management to fulfill its ethical duties to all stakeholders
1-16
 A Firm’s Ethical Responsibilities
to Its Stakeholders
Owners/shareholders – Rightfully expect some form of
return on their investment
Employees - Rightfully expect to be treated with dignity
and respect for devoting their energies to the enterprise
Customers - Rightfully expect a seller to provide them
with a reliable, safe product or service
Suppliers - Rightfully expect to have an equitable
relationship with firms they supply and be treated fairly
Community - Rightfully expect businesses to be good
citizens in their community
1-17
 Role of Senior Executives:
Linking Strategy with Ethics
◆ Forbid pursuit of ethically questionable business opportunities
◆ Insist all aspects of company strategy reflect high ethical
standards
◆ Make it clear all employees are expected to act with integrity
◆ Install organizational checks and balances to
➔ Monitor behavior
➔ Enforce ethical codes of conduct
➔ Provide guidance to employees in gray areas
◆ Display genuine commitment to conduct business activities
ethically

1-18
 What Is a Business Model?
◆ A business model addresses “How do we make money in this
business?”
➔ Is the strategy capable of delivering
good bottom-line results?
◆ Do the revenue-cost-profit economics
of the strategy make good business sense?
➔ Look at revenue streams the strategy is expected to produce
➔ Look at associated cost structure and potential profit margins
➔ Do resulting earnings streams and ROI indicate the strategy makes
sense and the company has a viable business model for making
money?
1-19
 Relationship Between
Strategy and Business Model
Strategy - Deals with a Business Model -Concerns
company’s competitive whether revenues and costs
initiatives and business flowing from the strategy
approaches demonstrate the business
can be amply profitable
and viable

1-20
 Microsoft’s
Business Model
Employ a cadre of highly skilled programmers to develop
proprietary code; keep source code hidden from users

Sell resulting OS and software packages to PC makers and

users at relatively attractive prices and achieve large unit
sales

Most costs in developing software are fixed; variable costs

are small - once breakeven volume is reached, revenues
from additional sales are almost pure profit

Provide technical support to users at no cost

1-21
 Redhat Linux’s
Business Model
Rely on collaborative efforts of volunteer programmers to create the
software
Add value to free, downloadable version of Linux by offering users Red
Hat Linux systems containing upgraded and tested features
Charge a modest fee to those preferring to subscribe to Red Hat Linux
version
Release updated versions of Red Hat Linux every 4-6 months to small
users and every 12-18 months to corporate users

Make source code open and available to all users

Make money by providing fees-based training, consulting, support,

engineering, and content management services

1-22
 Tests of a Winning Strategy
◆ GOODNESS OF FIT TEST

➔ How well does strategy fit

the firm’s situation?

◆ COMPETITIVE ADVANTAGE TEST

➔ Doesstrategy lead to sustainable

competitive advantage?

◆ PERFORMANCE TEST

➔ Does strategy boost firm performance?

1-23
 Other Criteria for Judging
the Merits of a Strategy
◆ Internal consistency and unity among all pieces of the strategy

◆ Degree of risk the strategy poses as compared to alternative

strategies

◆ Degree to which the strategy is flexible and adaptable to

changing circumstances

While these criteria are relevant, they seldom override

the importance of the three tests of a winning strategy!
1-24
 Why Is Strategy Important?

◆ A compelling need exists for managers to proactively

shape how a firm’s business
will be conducted

◆ A strategy-focused firm is more likely

to be a strong bottom-line performer
than one that views strategy as secondary
1-25
 Good Strategy + Good Strategy
Execution = Good Management
◆ Crafting and executing strategy are core management functions
◆ Among all things managers do, nothing affects a company’s ultimate
success or failure more fundamentally than how well its management
team
➔ Charts the company’s direction,
➔ Develops competitively effective strategic moves and business
approaches, and
➔ Pursues what needs to be done internally to produce good day-in/day-
out strategy execution

Excellent execution of an excellent strategy is the best

test of managerial excellence -- and the most reliable
recipe for winning in the marketplace!
1-26
Chapter

2
The Managerial Process of
Crafting and Executing Strategy

Dr.R.Nandagopal
Director
PSG Institute of Management
PSG College of Technology
1-27
 “If you don’t know where
you are going, any road will
take you there.”
The Koran

“Management’s job is not to

see the company as it is . . .
but as it can become.”
John W. Teets
1-28
 Chapter Roadmap
◆ What Does the Process of Crafting and Executing Strategy Entail?
◆ Developing a Strategic Vision: Phase 1 of the Strategy-Making, Strategy-
Executing Process
◆ Setting Objectives: Phase 2 of the Strategy-Making, Strategy-Executing
Process
◆ Crafting a Strategy: Phase 3 of the Strategy-Making, Strategy-Executing
Process
◆ Implementing and Executing the Strategy: Phase 4 of the Strategy-Making,
Strategy-Executing Process
◆ Initiating Corrective Adjustments: Phase 5 of the Strategy-Making,
Strategy-Executing Process
◆ Corporate Governance: The Role of the Board of Directors in the Strategy-
Making, Strategy-Executing Process
1-29
 Fig. 2.1: The Strategy-Making,
Strategy-Executing Process

1-30
 Developing a Strategic Vision
Phase 1 of the Strategy-Making Process
◆ Involves thinking strategically about
➔ Future direction of company
➔ Changes in company’s product-market-
customer-technology to improve
◼ Current market position
◼ Future prospects

A strategic vision is a road map showing the route a

company intends to take in developing and strengthening
its business. It paints a picture of a company’s
destination and provides a rationale for going there.
1-31
1-32
 Key Elements of a
Strategic Vision
◆ Delineates management’s aspirations for the business –
◆ Charts a strategic path for the future
“Where are we going?”
◆ Steers energies of employees
in a common direction
◆ Molds organizational identity
◆ Is distinctive and specific to
a particular organization
◆ Avoids use of generic language
◆ Triggers strong emotions
◆ Is challenging, uncomfortable, nail biting
1-33
1-34
1-35
 Exelon’s
Strategic Vision
One Company, One Vision.
Exelon strives to build exceptional value - by
becoming the best and most consistently profitable
electricity and gas company in the United States.
To succeed, we must . . .

Live up to our commitments . . .

Perform at world-class levels . . .

Invest in our consolidating industry . . .

1-36
 Examples of Strategic Visions

Red Hat Linux

To extend our position as the most trusted Linux and open source
provider to the enterprise. We intend to grow the market for
Linux through a complete range of enterprise Red Hat Linux
software, a powerful Internet management platform, and
associated support and services.

Wells Fargo
We want to satisfy all of our customers’ financial needs,
help them success financially, be the premier provider
of financial services in every one of our markets, and
be known as one of America’s great companies.
1-37
 Examples of Strategic Visions

Wyeth
Our vision is to lead the way to a healthier world. By
carrying out this vision at every level of our organization,
we will be recognized by our employees, customers, and
shareholders as the best pharmaceutical company in the
world, resulting in value for all. We will achieve this by:
◆ Leading the world in innovation by linking pharmaceutical,
biotech, and vaccines technologies
◆ Making quality, integrity, and excellence hallmarks
of the way we do business
◆ Attracting, developing, and motivating the best people
◆ Continually growing improving our business
1-38
 Examples of Strategic Visions

Dental Products Division of 3M Corporation

Become THE supplier of choice to the global dental professional
markets, providing world-class quality and innovative
products. [All employees of the division wear badges bearing
these words, and whenever a new product or business
procedure is being considered, management asks “Is this
representative of THE leading dental company?”]

Nike
To bring innovation inspiration to every athlete in the world.

1-39
 Examples of Strategic Visions

Intel
Our vision: Getting to a billion connected computers
worldwide, millions of servers, and trillions of dollars
of e-commerce. Intel’s core mission is being the
building block supplier to the Internet economy and
spurring efforts to make the Internet more useful.
Being connected is now at the center of people’s
computing experience. We are helping to expand the
capabilities of the PC platform and the Internet . . .
We have seen only the early stages of deployment of
digital technologies.
1-40
 Examples of Strategic Visions

Heinz
Our vision, quite simply, is to be the world’s premier food
company, offering nutritious, superior tasting foods to people
everywhere. Being the premier food company does not mean
being the biggest but it does mean being the best in terms of
consumer value, customer service, employee talent, and
consistent and predictable growth.

General Electric
We will become number one or number two in every market we
serve, and revolutionize this company to have
the speed and agility of a small enterprise.

1-41
 Strategic Vision vs. Mission
◆ A strategic vision concerns a ◆ The mission statement of most
firm’s future business path - companies focuses on current
“where we are going” business activities - “who we
➔ Markets to be pursued are and what we do”
➔ Future technology-product- ➔ Current product and
customer focus service offerings
➔ Customer needs being
➔ Kind of company
served
management is
➔ Technological
trying to create
and business
capabilities

1-42
 Characteristics of
a Mission Statement
◆ Defines current business activities, highlighting boundaries of
current business
➔ Presentproducts and services
➔ Types of customers served
◆ Conveys
➔ Who we are,
➔ What we do, and
➔ Why we are here

A company’s mission is not to make a profit! Its true mission

is its answer to “What will we do to make a profit?”
Making is profit is an objective or intended outcome!
1-43
 Key Elements of
a Mission Statement
◆ Three factors to consider

➔ Customer needs –
What is being satisfied

➔ Customer groups –
Who is being satisfied

➔ Technologies/resources/business approaches used and activities

performed –
How customer needs are satisfied

1-44
 Trader Joe’s
Mission Statement

(a unique grocery store chain)

To give our customers the best food and beverage

values that they can find anywhere and to provide
them with the information required for informed
buying decisions. We provide these with a dedication
to the highest quality of customer satisfaction
delivered with a sense of warmth, friendliness, fun,
individual pride, and company spirit.

1-45
 Linking the Vision
With Company Values
◆ A statement of values is often provided to guide the
company’s pursuit of its vision
◆ Values – Beliefs, business principles, and ways of doing things
that are incorporated into
➔ Company’s operations
➔ Behavior of workforce
◆ Values statements
➔ Contain between four and eight values
➔ Are ideally tightly connected to and reinforce company’s vision,
strategy, and operating practices
1-46
 Example: Company Values
Home Depot
Entrepreneurial
Creating spirit Excellent customer
shareholder value service

Building strong Giving back to the

relationships community

Taking care of Respect for all

people people
Doing the right
thing
1-47
 Example: Company Values
Du Pont

Safety Ethics

Respect for Environmental

people stewardship

1-48
 Communicating the
Strategic Vision
◆ An exciting, inspirational vision
➔ Contains memorable language
➔ Clearly maps company’s future direction
➔ Challenges and motivates workforce
➔ Provokes emotion and enthusiasm
◆ Winning support for the vision involves
➔ Putting “where we are going and why” in writing
➔ Distributing the statement organization-wide
➔ Having executives explain the vision
to the workforce
1-49
 Examples: Vision Slogans

Levi Strauss & Company

“We will clothe the world by marketing the most appealing and
widely worn casual clothing in the world.”

Microsoft Corporation
“Empower people through great software—any time, any
place, and on any device.”

Mayo Clinic
“The best care to every patient every day.”

1-50
 Examples: Vision Slogans

Scotland Yard
“To make London the safest major city in the world.”

Greenpeace
“To halt environmental abuse and
promote environmental solutions.”

Charles Schwab
“To provide customers with the most useful and
ethical financial services in the world.”
1-51
 Overcoming Resistance to
a New Strategic Vision
◆ Mobilizing support for a new vision entails

➔ Reiterating basis for the new direction

➔ Addressing employee concerns head-on

➔ Calming fears

➔ Lifting spirits

➔ Providing updates and progress

reports as events unfold

1-52
 Strategic Inflection Points
◆ There are times when companies come to a major fork in the
road.
➔ Perhaps because market conditions are changing rapidly in ways
that threaten or endanger the company’s business prospects
➔ Perhaps because the strategy simply runs out of stream
➔ Perhaps because the actions of competitors block the success of
the company’s present strategic course and strategy
◆ Critical decisions have to be made about where do we go from
here
➔A major new directional path may have to be taken
➔ A major new strategy may be needed

1-53
 Intel’s “Strategic
Inflection Points”
◆ Prior to mid-1980s
➔
Focus on memory chips
◆ Starting in mid-1980s
➔ Abandon memory chip business (due to lower-cost Japanese companies
taking over the market) and
◼ Become preeminent supplier of microprocessors to PC industry
◼ Make PC central appliance in
workplace and home
◼ Be undisputed leader in driving
PC technology forward
◆ 1998
➔ Shift focus from PC technology to becoming the preeminent building
block supplier to the Internet economy

1-54
 Payoffs of a
Clear Strategic Vision
◆ Crystallizes an organization’s long-term direction

◆ Reduces risk of rudderless decision-making

◆ Assists in gaining support of

organizational members for
changes to make the vision a reality

◆ Helps keep strategy-related actions

of managers on common path

◆ Helps an organization prepare for the future

1-55
 Setting Objectives
Phase 2 of the Strategy-Making Process
◆ Purpose of setting objectives
➔ Converts vision into specific performance targets
➔ Creates yardsticks to track performance
➔ Pushes firm to be inventive, intentional, and
focused in its actions
◆ Setting challenging, achievable
objectives guards against
➔ Complacency
➔ Internal confusion
➔ Status quo performance
1-56
 Characteristics of Objectives
◆ Represent commitment to achieve specific performance
targets
◆ Spell-out how much of what kind
of performance by when
◆ Well-stated objectives are
➔ Quantifiable

➔ Measurable

➔ Contain a deadline for achievement

Establishing objectives converts the
vision into concrete performance outcomes!
1-57
 Types of Objectives Required
Financial Objectives Strategic Objectives

Outcomes focused Outcomes focused on

on improving financial improving long-term
performance competitive business
position

1-58
 Examples: Financial
Objectives
◆ X % increase in annual revenues
◆ X % increase annually in after-tax profits
◆ X % increase annually in earnings per share
◆ Annual dividend increases of X %
◆ Profit margins of X %
◆ X % return on capital employed (ROCE)
◆ Increased shareholder value
◆ Strong bond and credit ratings
◆ Sufficient internal cash flows to fund 100% of new capital
investment
◆ Stable earnings during periods of recession
1-59
 Examples: Strategic
Objectives
◆ Winning an X % market share
◆ Achieving lower overall costs than rivals
◆ Overtaking key competitors on product performance or quality or
customer service
◆ Deriving X % of revenues from sale of new products introduced in past
5 years
◆ Achieving technological leadership
◆ Having better product selection than rivals
◆ Strengthening company’s brand name appeal
◆ Having stronger national or global sales and distribution capabilities
than rivals
◆ Consistently getting new or improved products to market ahead of
rivals
1-60
 Unilver’s Strategic and
Financial Objectives

◆ Grow annual revenues by 5-6% annually

◆ Increase operating profit margins from 11% to 16%
within 5 years
◆ Trim company’s 1200 food, household, and personal
care products down to 400 core brands
◆ Focus sales and marketing efforts on those brands with
potential to become respected,
market-leading global brands
◆ Streamline company’s supply chain

1-61
 The Kroger Company’s Strategic
and Financial Objectives

◆ Reduce our operating and administrative

cost by $500 million by year-end 2003
◆ Leverage our $51 billion size to achieve greater
economies of scale
◆ Reinvest in our core business to
increase sales and market share
◆ Grow earnings per share by 10-12% in 2002-2003 and
by 13-15% annually starting in 2004.

1-62
 Seagate Technology’s
Strategic Objectives

◆ Solidify the company’s No. 1 position in

the overall market for hard-disk drives
◆ Get more Seagate drives into popular consumer
electronics products (i.e. video recorders)
◆ Take share away from Western Digital in providing
disk drives for Microsoft’s Xbox
◆ Capture a 10% share of the market for 2.5-inch hard
drives for notebook computers by 2004

1-63
 Heinz’s Financial and
Strategic Objectives
◆ Achieve earnings per share in the range
of $2.15-$2.25 in 2004
◆ Increase operating cash flow by 45% to $750 million
◆ Reduce net debt by $1.3 billion in 2003 and further strengthen the
company balance sheet in 2004
◆ Continue to introduce new and improved food products
◆ Remove the clutter in the company product offerings by reducing
the number of SKUs
◆ Increase spending on trade promotion and advertising by $200
million to strengthen the recognition and market shares of the
company’s core brands
◆ Divest non-core underperforming product lines
1-64
 DuPont’s Financial and
Strategic Objectives

◆ To achieve annual revenue growth of 5 to 6% and annual

earnings-per-share growth averaging 10%
◆ Grow per-share profits faster than revenues by
(a) Increasing productivity,
(b) Selling enough new products each year that average
prices and average margins rise, and
(c) Using surplus cash to buy back shares
◆ Sell the company’s low-margin textiles and interiors
division (with sales of $6.6 billion and operating profits of
only $114 million)

1-65
 3M Corporation’s Financial
and Strategic Objectives

◆ To achieve annual growth in earnings per

share of 10% or better, on average
◆ A return on stockholders’ equity
of 20-25%
◆ A return on capital employed
of 27% or better
◆ Have at least 30% of sales come from products
introduced in the past four years
1-66
 Strategic Performance Fosters
Better Financial Performance
◆ A company’s achievement of satisfactory financial performance, by itself,
is not enough
➔ Financial performance measures are “lagging indicators” reflecting
results of past decisions and actions
◆ Of equal or greater importance is a company’s performance on measures of
its strategic well-being —
its competitiveness and market position
➔ Strategic performance measures are “leading indicators” of a
company’s future financial performance and business prospects
➔ Achievement of strategic performance targets
◼ Signals growing competitiveness
◼ Signals growing strength in the marketplace

1-67
 Balanced Scorecard Approach –
Strategic and Financial Objectives
◆ Balanced scorecard approach for measuring
company performance requires both –
➔ Financial objectives
➔ Strategic objectives
◆ Emphasis on financial performance may assume
priority over strategic performance when company’s
➔ Financial performance is dismal and
➔ Survival is threatened
◆ Otherwise, management is advised to put more emphasis on
achieving strategic objectives
The surest path to sustained future profitability
year after year is to relentlessly pursue strategic outcomes
that strengthen a company’s business position and
give it a growing competitive advantage over rivals!
1-68
 Short-Term vs.
Long-Term Objectives
◆ Short-term objectives

➔ Targets to be achieved soon

➔ Milestones or stair steps for reaching long-range performance
◆ Long-term objectives

➔ Targets to be achieved within

3 to 5 years
➔ Prompt actions now that will
permit reaching targeted
long-range performance later

1-69
 Concept of Strategic Intent
A company exhibits strategic intent when it relentlessly
pursues an ambitious strategic objective and concentrates its
competitive actions and
energies on achieving that objective!

1-70
 Characteristics of
Strategic Intent
◆ Indicates firm’s intent to making quantam gains in competing
against key rivals and to establishing itself as a winner in the
marketplace, often against long odds

◆ Involves establishing a grandiose performance target that is

out of proportion to its immediate capabilities and market
position but then devoting the company’s
full resources and energies to achieving the target over time

◆ Signals relentless commitment to

achieving a particular market position
and competitive standing
1-71
 Objectives Are Needed
at All Levels
1. First, establish organization-wide objectives and
performance targets

2. Next, set business and

product line objectives

3. Then, establish functional

and departmental objectives

4. Individual objectives are established last

1-72
 Importance of
Top-Down Objectives
◆ Guide objective-setting and strategy-making at lower levels

◆ Ensures financial and strategic performance targets for all

business units, divisions, and departments are directly
connected to achieving company-wide objectives
◆ Integration of objectives has two advantages
➔ Helps produce cohesion among objectives and
strategies of different parts of organization
➔ Helps unify internal efforts to move a
company along the chosen strategic path

1-73
 Crafting a Strategy
Phase 3 of the Strategy-Making Process
◆ Strategy-making involves entrepreneurship –
searching for opportunities
➔ To do new things or
➔ To do existing things in new or better ways

◆ Strategizing involves

➔ Picking up on happenings in the external environment and

➔ Steering company activities in new directions dictated by
shifting market conditions
1-74
 Activities Involved in
Crafting a Strategy
◆ Studying market trends and actions of competitors

◆ Listening to customers, anticipating their changing needs

◆ Scrutinizing business possibilities

based on new technology
Our strategy
will be . . .
◆ Building firm’s market position
via acquisitions or new products

◆ Pursuing ways to strengthen

firm’s competitive capabilities
1-75
 Who Participates in Crafting
a Company’s Strategy?
◆ Chief executive officer - CEO
◆ Senior corporate executives
◆ Chief financial officer - CFO
◆ Managers of business divisions and
major product lines
◆ Key VPs for production, marketing, human resources, and
other functional departments
Every company manager has a strategy-making,
strategy-executing role – ranging from minor to major –
for the area he or she heads!
1-76
 Strategizing: An Individual
or Team Responsibility?
◆ Teams are increasingly used because
➔ Finding market- and customer-driven solutions is
necessary
➔ Complex strategic issues cut across
functional areas and departmental units
➔ Ideas of people with different
backgrounds and experiences
strengthen strategizing effort
➔ Groups charged with crafting the
strategy often include the people
charged with implementing it
1-77
 Fig. 2.2: A Company’s Strategy-Making Hierarchy

1-78
 Levels of Strategy-Making
in a Diversified Company

Corporate-Level Corporate
Managers Strategy
Two-Way Influence

Business-Level
Business Strategies
Managers
Two-Way Influence

Functional
Functional Strategies
Managers
Two-Way Influence

Operating
Managers Operating Strategies

1-79
 Levels of Strategy-Making in
a Single-Business Company

Business-Level
Business
Managers Strategy
Two-Way Influence

Functional
Functional Strategies
Managers

Two-Way Influence

Operating
Managers Operating Strategies

1-80
 Tasks of Corporate Strategy
◆ Moves to achieve diversification

◆ Actions to boost performance of individual businesses

◆ Capturing valuable cross-business synergies to provide

1 + 1 = 3 effects!

◆ Establishing investment
priorities and steering
corporate resources into the
most attractive businesses

1-81
 Tasks of Business Strategy
◆ Initiating approaches to produce successful performance in a
specific business
◆ Crafting competitive moves to build
sustainable competitive advantage
◆ Developing competitively valuable
competencies and capabilities
◆ Uniting strategic activities of functional areas

◆ Gaining approval of business strategies by corporate-level

officers and directors
1-82
 Tasks of Functional Strategies
◆ Game plan for a strategically-relevant
function, activity, or business process

◆ Detail how key activities

will be managed

◆ Provide support for

business strategy

◆ Specify how functional objectives

are to be achieved
1-83
 Tasks of Operating Strategies
◆ Concern narrower strategies for
managing grassroots activities and
strategically-relevant operating units

◆ Add detail to business

and functional strategies

◆ Delegation of responsibility
to frontline managers

1-84
 Uniting the Company’s
Strategy-Making Effort

◆ A firm’s strategy is really a collection of initiatives

undertaken by managers at all levels in the organizational
hierarchy

◆ All the various strategic initiatives must be unified into

a cohesive, company-wide action plan

◆ Pieces of strategy should fit

together like the pieces of a puzzle

1-85
 What Is a Strategic Plan?

Its strategic vision

and business mission
A
Company’s
Strategic Its strategic and
Plan financial objectives
Consists
of

Its strategy

1-86
 Implementing and Executing Strategy

Phase 4 of the Strategy-Making Process

◆ Action-oriented, operations-driven activity aimed at shaping
performance of core business activities in a strategy-supportive
manner

◆ Tougher and more time-consuming

than crafting strategy

◆ Key tasks include

➔ Improving efficiency of the strategy being executed

➔ Showing measurable progress in achieving targeted results

1-87
 What Does Strategy
Implementation Involve?
◆ Building a capable organization
◆ Allocating resources to strategy-critical activities
◆ Establishing strategy-supportive policies
◆ Instituting best practices and programs for
continuous improvement
◆ Installing information, communication, and operating systems
◆ Motivating people to pursue the target objectives
◆ Tying rewards to achievement of results
◆ Creating a strategy-supportive corporate culture
◆ Exerting the leadership necessary to drive the process forward and
keep improving

1-88
 Characteristics of Good
Strategy Execution
◆ Involves creating strong “fits” between strategy and
➔ Organizational capabilities
➔ Reward structure
➔ Internal operating systems
➔ Organization’s work climate and culture
◆ The stronger the “fits” the
➔ Better the execution
➔ Higher a company’s odds of achieving its performance targets

1-89
 Evaluating Performance and
Making Corrective Adjustments
Phase 4 of the Strategy-Making Process
◆ Tasks of crafting and implementing the strategy are not a one-
time exercise
➔ Customer needs and competitive conditions change
➔ New opportunities appear; technology
advances; any number of other
outside developments occur
➔ One or more aspects of executing the
strategy may not be going well
➔ New managers with different ideas take over
➔ Organizational learning occurs
◆ All these trigger the need for corrective actions and
adjustments on an as-needed basis
1-90
 Monitoring, Evaluating, and
Adjusting as Needed
◆ Taking actions to adjust to the march of events tends to result
in one or more of the following

➔ Altering long-term direction and/or

redefining the mission/vision

➔ Raising, lowering, or changing

performance objectives

➔ Modifying the strategy

➔ Improving strategy execution

1-91
 Corporate Governance: Strategic
Role of a Board of Directors
◆ Exercise strong oversight to ensure the five tasks of strategic
management are executed to benefit
➔ Shareholders or
➔ Stakeholders
◆ Make sure executive actions are not only proper but also
aligned with interests of stakeholders

1-92
 Obligations of a
Board of Directors
◆ Be inquiring critics and overseers
◆ Evaluate caliber of senior executives’ strategy-making and
strategy-executing skills
◆ Institute a compensation plan for
top executives rewarding them for
results that serve interests of
➔ Stakeholders and
➔ Shareholders
◆ Have courage to intervene when
things are not going well or to rein
in a CEO who steps “out of bounds”
1-93
 Good Corporate
Governance Matters
◆ The whole fabric of effective corporate governance is undermined
when boards of directors shirk their responsibility to maintain ultimate
control over
➔ Company’s strategic direction,
➔ Major elements of its strategy, and
➔ Business approaches management is using to implement and execute
the strategy
◆ Board members are obligated to rein in a CEO who oversteps the
bounds of sound business principles and ethical behavior
➔ A rubber stamp board abdicates its responsibility to shareholders

Boards of directors have a very important oversight role in

the strategy-making, strategy-executing process!
1-94
Chapter

3
Analyzing a Company’s
External Environment

Dr.R.Nandagopal
Director
PSG Institute of Management
PSG College of Technology
1-95
 What Is Situation Analysis?
◆ Two considerations

➔ Company’sexternal or
macro-environment
◼ Industry and competitive conditions

➔ Company’s internal or
micro-environment
◼ Competencies, capabilities,
resource strengths and weaknesses,
and competitiveness

1-96
 Fig. 3.2: The Components of a
Company’s Macro-Environment

1-97
 Key Questions Regarding the
Industry and Competitive Environment

Industry’s
dominant
economic traits

Competitive
Drivers of
forces and
change in the
strength of
industry
each force

Conclusions:
Competitor Key success Industry
analysis factors attractiveness

1-98
 Q #1: What are the Industry’s
Dominant Economic Traits?
◆ Market size and growth rate
◆ Scope of competitive rivalry
◆ Number of rivals
◆ Buyer needs and requirements
◆ Production capacity
◆ Pace of technological change
◆ Vertical integration
◆ Product innovation
◆ Degree of product differentiation
◆ Economies of scale
◆ Learning and experience curve effects
1-99
 Q #2: What Kinds of Competitive Forces
Are Industry Members Facing?

◆ Objectives are to identify

➔ Main sources of competitive forces

➔ Strength of these forces

◆ Key analytical tool

➔ Five Forces Model

of Competition

1-100
 Fig. 3.3: The Five Forces
Model of Competition

1-101
 Analyzing the Five Competitive
Forces: How to Do It
Step 1: Identify the specific competitive
pressures associated with each of
the five forces

Step 2: Evaluate the strength of each

competitive force -- fierce, strong,
moderate to normal, or weak?

Step 3: Determine whether the collective strength

of the five competitive forces is conducive
to earning attractive profits
1-102
 Rivalry Among Competing Sellers

◆ Usually the strongest of the five forces

◆ Key factor in determining strength of rivalry

➔ How aggressively are rivals using various weapons of

competition to improve their market positions and performance?
◆ Competitive rivalry is a combative
contest involving
➔ Offensive actions
➔ Defensive countermoves

1-103
 What Are the Typical
Weapons for Competing?
◆ Vigorous price competition ◆ Bigger/better dealer network

◆ More or different performance ◆ Low interest rate financing

features
◆ Higher levels of advertising
◆ Better product performance
◆ Stronger product innovation
◆ Higher quality capabilities
◆ Stronger brand image and ◆ Better customer service
appeal
◆ Stronger capabilities to provide
◆ Wider selection of models and buyers with custom-made
styles products

1-104
 What Causes Rivalry
to be Stronger?
◆ Competitors engage in frequent and aggressive launches of new offensives
to gain sales and market share
◆ Slow market growth
◆ Number of rivals increases and rivals are of
equal size and competitive capability
◆ Buyer costs to switch brands are low
◆ Industry conditions tempt rivals to use price cuts or other competitive
weapons to boost volume
◆ A successful strategic move carries a big payoff
◆ Diversity of rivals increases in terms of visions, objectives, strategies,
resources, and countries of origin
◆ Strong rivals outside the industry acquire weak firms in the industry and
use their resources to transform the new firms into major market contenders

1-105
 What Causes Rivalry
to be Weaker?
◆ Industry rivals move only infrequently or in a non-aggressive
manner to draw sales from rivals
◆ Rapid market growth

◆ Products of rivals are strongly differentiated

and customer loyalty is high
◆ Buyer costs to switch brands are high

◆ There are fewer than 5 rivals or there are numerous rivals so

any one firm’s actions has minimal impact on rivals’ business

1-106
 Competitive Force
of Potential Entry
◆ Seriousness of threat depends on
➔ Size of pool of entry candidates
and available resources
➔ Barriers to entry
➔ Reaction of existing firms
◆ Evaluating threat of entry involves assessing
➔ How formidable entry barriers are for each type of potential
entrant and
➔ Attractiveness of growth and profit prospects

1-107
 Common Barriers to Entry
◆ Sizable economies of scale

◆ Cost and resource disadvantages independent of size

◆ Brand preferences and customer loyalty

◆ Capital requirements and/or other

specialized resource requirements
◆ Access to distribution channels

◆ Regulatory policies

◆ Tariffs and international trade restrictions

1-108
 When Is the Threat
of Entry Stronger?
◆ There’s a sizable pool of entry candidates

◆ Entry barriers are low

◆ Industry growth is rapid and profit

potential is high

◆ Incumbents are unwilling or unable to contest a newcomer’s entry

efforts

◆ When existing industry members have a strong incentive to expand into

new geographic areas or new product segments where they currently do
not have a market presence
1-109
 When Is the Threat
of Entry Weaker?
◆ There’s only a small pool of entry candidates

◆ Entry barriers are high

◆ Existing competitors are struggling to earn good profits

◆ Industry’s outlook is risky

◆ Industry growth is slow or stagnant

1-110
 Competitive Force of
Substitute Products
Concept
Substitutes matter when customers are attracted to the products
of firms in other industries

Examples
➔ Eyeglasses and contact lens
vs. laser surgery
➔ Sugar vs. artificial sweeteners
➔ Newspapers vs. TV vs. Internet
1-111
 How to Tell Whether Substitute
Products Are a Strong Force
◆ Whether substitutes are
readily available and attractively
priced

◆ Whether buyers view substitutes as

being comparable or better

◆ How much it costs end users to

switch to substitutes

1-112
 When Is the Competition
From Substitutes Stronger?
◆ There are many good substitutes that are readily available

◆ The lower the price of substitutes

◆ The higher the quality and

performance of substitutes

◆ The lower the user’s switching costs

1-113
 Competitive Pressures From Suppliers
and Supplier-Seller Collaboration
◆ Whether supplier-seller relationships represent a
weak or strong competitive force depends on

➔ Whether suppliers can exercise

sufficient bargaining leverage to
influence terms of supply in their favor

➔ Nature and extent of supplier-seller

collaboration in the industry

1-114
 When Is the Bargaining
Power of Suppliers Stronger?
◆ Industry members incur high costs in switching their purchases
to alternative suppliers
◆ Needed inputs are in short supply

◆ Supplier provides a differentiated input

that enhances the quality of performance
of sellers’ products or is a valuable part
of sellers’ production process
◆ There are only a few suppliers of a specific input

◆ Some suppliers threaten to integrate forward

1-115
 When Is the Bargaining
Power of Suppliers Weaker?
◆ Item being supplied is a commodity

◆ Seller switching costs to alternative suppliers are low

◆ Good substitutes exist or new ones emerge

◆ Surge in availability of supplies occurs

◆ Industry members account for a big

fraction of suppliers’ total sales
◆ Industry members threaten to integrate backward

◆ Seller collaboration with selected suppliers provides attractive

win-win opportunities
1-116
 Competitive Pressures: Collaboration
Between Sellers and Suppliers
◆ Sellers are forging strategic partnerships
with select suppliers to
➔ Reduce inventory and logistics costs
➔ Speedavailability of next-generation
components
➔ Enhance quality of parts being supplied
➔ Squeeze out cost savings for both parties
◆ Competitive advantage potential may accrue to sellers doing the
best job of managing supply-chain relationships

1-117
 Competitive Pressures From Buyers
and Seller-Buyer Collaboration
◆ Whether seller-buyer relationships represent a
weak or strong competitive force depends on

➔ Whether buyers have sufficient bargaining

leverage to influence terms of sale in their favor

➔ Extent and competitive importance of

seller-buyer strategic partnerships
in the industry

1-118
 When Is the Bargaining
Power of Buyers Stronger?
◆ Buyer switching costs to competing brands or substitutes are low
◆ Buyers are large and can demand concessions
◆ Large-volume purchases by buyers are important to sellers
◆ Buyer demand is weak or declining
◆ Only a few buyers exists
◆ Identity of buyer adds prestige
to seller’s list of customers
◆ Quantity and quality of information
available to buyers improves
◆ Buyers have ability to postpone purchases until later
◆ Buyers threaten to integrate backward

1-119
 When Is the Bargaining
Power of Buyers Weaker?
◆ Buyers purchase item infrequently or in small quantities

◆ Buyer switching costs to competing brands are high

◆ Surge in buyer demand creates a “sellers’ market”

◆ Seller’s brand reputation is important to buyer

◆ A specific seller’s product delivers quality

or performance that is very important to buyer

◆ Buyer collaboration with selected sellers provides attractive

win-win opportunities
1-120
 Strategic Implications of the
Five Competitive Forces
◆ Competitive environment is unattractive from
the standpoint of earning good profits when
➔ Rivalry is vigorous
➔ Entry barriers are low
and entry is likely
➔ Competition from
substitutes is strong
➔ Suppliers and customers have
considerable bargaining power

1-121
 Strategic Implications of the
Five Competitive Forces
◆ Competitive environment is ideal from
a profit-making standpoint when
➔ Rivalry is moderate

➔ Entry barriers are high

and no firm is likely to enter

➔ Good substitutes
do not exist

➔ Suppliers and customers are

in a weak bargaining position

1-122
 Coping With the
Five Competitive Forces
◆ Objective is to craft a strategy to

➔ Insulate firm from

competitive pressures

➔ Initiateactions to produce
sustainable competitive advantage

➔ Allow firm to be the industry’s “mover and shaker” with the

“most powerful” strategy that defines the
business model for the industry
1-123
 Q #3: What Factors Are Driving Industry
Change and What Impacts Will They Have?

◆ Industries change because forces

are driving industry participants
to alter their actions

◆ Driving forces are the

major underlying causes
of changing industry and
competitive conditions

1-124
 Analyzing Driving Forces
1. Identify forces likely to exert greatest
influence over next 1 - 3 years
➔ Usually no more than 3 - 4 factors
qualify as real drivers of change
2. Assess impact
➔ Are the driving forces causing demand for product to increase
or decrease?
➔ Are the driving forces acting to make competition more or less
intense?
➔ Will the driving forces lead to higher or lower industry
profitability?
1-125
 Common Types of
Driving Forces
◆ Internet and e-commerce opportunities

◆ Increasing globalization of industry

◆ Changes in long-term industry growth rate

◆ Changes in who buys the product and

how they use it
◆ Product innovation

◆ Technological change/process innovation

◆ Marketing innovation
1-126
 Common Types of
Driving Forces
◆ Entry or exit of major firms

◆ Diffusion of technical knowledge

◆ Changes in cost and efficiency

◆ Consumer preferences shift from standardized to differentiated

products (or vice versa)
◆ Changes in degree of uncertainty and risk

◆ Regulatory policies / government legislation

◆ Changing societal concerns, attitudes, and lifestyles

1-127
 Question 4: What Market
Positions Do Rivals Occupy?

◆ One technique to reveal

different competitive positions
of industry rivals is
strategic group mapping

◆ A strategic group is a
cluster of firms in an industry
with similar competitive
approaches and market positions
1-128
 Strategic Group Mapping
◆ Firms in same strategic group have two or more competitive
characteristics in common
➔ Have comparable product line breadth
➔ Sell in same price/quality range
➔ Emphasize same distribution channels
➔ Use same product attributes to appeal
to similar types of buyers
➔ Use identical technological approaches
➔ Offer buyers similar services
➔ Cover same geographic areas
1-129
 Example: Strategic Group Map
of Selected Retail Chains

1-130
 Guidelines: Strategic Group Maps

◆ Variables selected as axes should not be highly correlated

◆ Variables chosen as axes should expose big differences in how
rivals compete
◆ Variables do not have to be either quantitative or continuous
◆ Drawing sizes of circles proportional to combined sales of
firms in each strategic group allows map to reflect relative
sizes of each strategic group
◆ If more than two good competitive variables can be used,
several maps can be drawn

1-131
 Q #5: What Strategic Moves
Are Rivals Likely to Make?
◆ A firm’s best strategic moves are affected by
➔ Current strategies of competitors
➔ Future actions of competitors
◆ Profiling key rivals involves gathering
competitive intelligence about
➔ Current strategies
➔ Most recent actions and public announcements
➔ Resource strengths and weaknesses
➔ Efforts being made to improve their situation
➔ Thinking and leadership styles of top executives
1-132
 Competitor Analysis
◆ Sizing up strategies and competitive strengths and
weaknesses of rivals involves assessing
➔ Which rival has the best strategy? Which rivals
appear to have weak strategies?
➔ Which firms are poised to gain
market share, and which ones
seen destined to lose ground?
➔ Which rivals are likely to rank among the industry leaders five
years from now? Do any up-and-coming rivals have strategies
and the resources to overtake the current industry leader?

1-133
 Considerations Involved in
Predicting Moves of Rivals
◆ Which rivals need to increase their unit sales and market
share? What strategies are rivals most likely to pursue?
◆ Which rivals have a strong incentive, along with resources, to
make major strategic changes?
◆ Which rivals are good candidates to be acquired? Which rivals
have the resources to acquire others?
◆ Which rivals are likely to enter new geographic markets?

◆ Which rivals are likely to expand their product offerings and

enter new product segments?
1-134
 Q #6: What Are the Key Factors
for Competitive Success?
◆ KSFs are those competitive factors most affecting every
industry member’s ability to prosper. They concern
➔ Specific strategy elements
➔ Product attributes
➔ Resources
➔ Competencies
➔ Competitive capabilities
that a company needs to have to be competitively successful
◆ KSFs are attributes that spell the difference between
➔ Profit and loss
➔ Competitive success or failure
1-135
 Identifying Industry
Key Success Factors
◆ Pinpointing KSFs involves determining

➔ On what basis do customers choose

between competing brands of sellers?

➔ What resources and competitive capabilities does a seller need to

have to be competitively successful?

➔ What does it take for sellers to achieve a sustainable competitive

advantage?

◆ KSFs consist of the 3 - 5 major determinants

of financial and competitive success
1-136
1-137
 Example: KSFs for
Beer Industry
◆ Full utilization of brewing capacity –
to keep manufacturing costs low

◆ Strong network of wholesale distributors –

to gain access to retail outlets

◆ Clever advertising –
to induce beer drinkers to
buy a particular brand

1-138
 Example: KSFs for Apparel
Manufacturing Industry

◆ Appealing designs and

color combinations –
to create buyer appeal

◆ Low-cost manufacturing
efficiency – to keep selling
prices competitive

1-139
 Example: KSFs for Tin and
Aluminum Can Industry

◆ Locating plants close to end-use customers –

to keep costs of shipping empty cans low

◆ Ability to market plant output within

economical shipping distances

1-140
 Q #7: Does the Outlook for the Industry
Present an Attractive Opportunity?
◆ Involves assessing whether the industry
and competitive environment is attractive
or unattractive for earning good profits

◆ Under certain circumstances, a firm uniquely

well-situated in an otherwise unattractive industry
can still earn unusually good profits

➔ Attractiveness is relative, not absolute

➔ Conclusions have to be drawn from the

perspective of a particular company
1-141
 Factors to Consider in
Assessing Industry Attractiveness
◆ Industry’s market size and growth potential
◆ Whether competitive forces are conducive to rising/falling industry
profitability
◆ Whether industry profitability will be favorably or unfavorably
impacted by driving forces
◆ Degree of risk and uncertainty in industry’s future
◆ Severity of problems facing industry
◆ Firm’s competitive position in industry vis-à-vis rivals
◆ Firm’s potential to capitalize on
vulnerabilities of weaker rivals
◆ Whether firm has sufficient resources to
defend against unattractive industry factors
1-142
 Core Concept: Assessing
Industry Attractiveness

The degree to which an industry is

attractive or unattractive is often not the
same for all industry participants
or potential entrants.
The opportunities an industry
presents depend partly on a
company’s ability to capture them.
1-143
 What Is Strategy

1-144
Strategic Management
 The Three Big Strategic Questions
1. Where are we now?
2. Where do we want to go?
3. How will we get there?
➔A company’s answer to “how
will we get there?” is its strategy

1-145
Strategic Management
 What Is Strategy?
◆ Consists of the combination of competitive moves and
business approaches used by managers to run the company
◆ Management’s “game plan” to
➔ Attract and please customers
➔ Stake out a market position
➔ Compete successfully
➔ Grow the business
➔ Achieve targeted objectives

1-146
Strategic Management
 The Hows That
Define a Firm's Strategy
◆ How to please customers

◆ How to respond to changing

market conditions Strategy
is HOW
to . . .
◆ How to outcompete rivals

◆ How to grow the business

◆ How to manage each functional piece of the business and

develop needed organizational capabilities

◆ How to achieve strategic and financial objectives

1-147
Strategic Management
 Why Strategy?
◆ A company’s strategy is a work in progress

◆ Changes may be necessary to react to

➔ Fresh moves of competitors

➔ Evolving customer preferences

➔ Technological breakthroughs

➔ Shifting market conditions

➔ Crisis situations
1-148
Strategic Management
 Strategy Vs Business Model

Strategy - Deals with a Business Model -

company’s competitive Concerns whether
initiatives and business revenues and costs
approaches flowing from the
strategy demonstrate
the business can be
amply profitable and
viable

1-149
Strategic Management
 Why Is It
Important?

1-150
Strategic Management
 Why Is Strategy Important?

◆ A compelling need exists for managers to proactively

shape how a firm’s business
will be conducted

◆ A strategy-focused firm is more likely

to be a strong bottom-line performer
than one that views strategy as secondary

1-151
Strategic Management
 Strategic
Management
Process

1-152
Strategic Management
 Ext.Anal Int.Ana Strat.Direc
Strat.Ch/Opt.
Vision, Mission
Strategic Planning

Strat. Plan Formul. Goals, Targets

Strategic Plan Direction
Corporate,
Strategy Business,
Testing Operational
Organization
Resource Assess. Structure,
Org. Adj. Systems,
Processes

Implement. Financial,
Human,
Other
Monitor.

Feedback

Strategic Management Process

1-153
 Strategic
Vision & Mission

1-154
Strategic Management
 Vision & Mission
◆ Why is this firm in business?
◆ What are our economic goals?
◆ What is our operating philosophy in terms of quality,
company image, and self-concept?
◆ What are our core competencies and competitive
advantage?
◆ What customers do and can we serve?
◆ How do we view our responsibilities to stake holders,
employees, communities, environment, social issues, and
competitors?

1-155
Strategic Management
 Strategic Vision

◆ Involves thinking strategically about

➔ Future direction of company
➔ Changes in company’s product-market-
customer-technology to improve
◼ Current market position
◼ Future prospects

1-156
Strategic Management
 Strategic Vision

A strategic vision is a road map showing the

route a company intends to take in developing
and strengthening its business. It paints a
picture of a company’s destination and provides
a rationale for going there.

1-157
Strategic Management
 Characteristics of
a Mission Statement
◆ Defines current business activities, highlighting boundaries of
current business
➔ Presentproducts and services
➔ Types of customers served
◆ Conveys
➔ Who we are,
➔ What we do, and
➔ Why we are here

1-158
Strategic Management
 Key Elements of a
Strategic Vision

◆ Charts a strategic path for the future

“Where are we going?”
◆ Steers energies of employees
◆ Molds organizational identity
◆ Is distinctive and specific to a particular organization
◆ Avoids use of generic language
◆ Triggers strong emotions
◆ Is challenging, uncomfortable, nail biting

1-159
Strategic Management
 Exercise -
One
1-160
Strategic Management
 Strategic Vision vs. Mission
◆ A strategic vision concerns a ◆ The mission statement of
firm’s future business path - most companies focuses on
“where we are going” current business activities -
➔ Markets to be pursued “who we are and what we do”
➔ Future technology-product- ➔ Current product and
customer focus service offerings
➔ Customer needs being
➔ Kind of company
served
management is
➔ Technological
trying to create
and business
capabilities

1-161
Strategic Management
 Linking the Vision
With Company Values
◆ A statement of values is often provided to guide the
company’s pursuit of its vision
◆ Values – Beliefs, business principles, and ways of doing
things that are incorporated into
➔ Company’s operations
➔ Behavior of workforce
◆ Values statements
➔ Contain between four and eight values
➔ Are ideally tightly connected to and reinforce company’s
vision, strategy, and operating practices
1-162
 SESSION-II

1-163
 Setting Objectives
◆ Purpose of setting objectives
➔ Converts vision into specific performance targets
➔ Creates yardsticks to track performance
➔ Pushes firm to be inventive, intentional, and
focused in its actions
◆ Setting challenging, achievable
objectives guards against
➔ Complacency
➔ Internal confusion
➔ Status quo performance

1-164
Strategic Management
 Characteristics of Objectives
◆ Represent commitment to achieve specific performance
targets
◆ Spell-out how much of what kind
of performance by when
◆ Well-stated objectives are
➔ Quantifiable

➔ Measurable

➔ Contain a deadline for achievement

Establishing objectives converts the
vision into concrete performance outcomes!
1-165
 Types of Objectives Required
Financial Objectives Strategic Objectives

Outcomes focused Outcomes focused on

on improving financial improving long-term
performance competitive business
position

1-166
Strategic Management
 Examples: Financial
Objectives
◆ X % increase in annual revenues
◆ X % increase annually in after-tax profits
◆ X % increase annually in earnings per share
◆ Annual dividend increases of X %
◆ Profit margins of X %
◆ X % return on capital employed (ROCE)
◆ Increased shareholder value
◆ Strong bond and credit ratings
◆ Sufficient internal cash flows to fund 100% of new capital
investment
◆ Stable earnings during periods of recession
1-167
Strategic Management
 Examples: Strategic
Objectives
◆ Winning an X % market share
◆ Achieving lower overall costs than rivals
◆ Overtaking key competitors on product performance or quality or
customer service
◆ Deriving X % of revenues from sale of new products introduced in past 5
years
◆ Achieving technological leadership
◆ Having better product selection than rivals
◆ Strengthening company’s brand name appeal
◆ Having stronger national or global sales and distribution capabilities
than rivals
◆ Consistently getting new or improved products to market ahead of rivals

1-168
Strategic Management
 Unilver’s Strategic and
Financial Objectives

• Grow annual revenues by 5-6% annually

• Increase operating profit margins from 11% to 16%
within 5 years
• Trim company’s 1200 food, household, and personal
care products down to 400 core brands
• Focus sales and marketing efforts on those brands
with potential to become respected,
market-leading global brands
• Streamline company’s supply chain

1-169
 3M Corporation’s Financial
and Strategic Objectives

◆ To achieve annual growth in earnings per share of

10% or better, on average
◆ A return on stockholders’ equity
of 20-25%
◆ A return on capital employed
of 27% or better
◆ Have at least 30% of sales come from products
introduced in the past four years

1-170
 Short-Term vs.
Long-Term Objectives
◆ Short-term objectives

➔ Targets to be achieved soon

➔ Milestones or stair steps for reaching long-range performance
◆ Long-term objectives

➔ Targets to be achieved within

3 to 5 years
➔ Prompt actions now that will
permit reaching targeted
long-range performance later

1-171
 Levels of Strategy-Making
in a Diversified Company

Corporate-Level Corporate
Managers Strategy
Two-Way Influence

Business-Level
Managers Business Strategies

Two-Way Influence

Functional
Functional Strategies
Managers
Two-Way Influence

Operating
Managers Operating Strategies

1-172
 Levels of Strategy-Making in
a Single-Business Company

Business-Level
Business
Managers Strategy

Two-Way Influence

Functional
Functional Strategies
Managers

Two-Way Influence

Operating
Managers Operating Strategies

1-173
 Resource Based Model Of Above Average Returns

Resources Capability Competitive

• Inputs into a firm’s • Capability of an Advantage
production process integrated set of • Ability of a firm to
resources to outperform its rivals
integrative perform a
task or activity

Superior Returns Strategy formulation An Attractive Industry

• Earning of above and Implementation • An industry with
average returns • Strategic actions opportunities that can
taken to earn above be exploited by the
average returns firm’s resources and
capabilities

1-174
Strategic Management
1-175
Strategic Management
 Environmental
Analysis

1-176
 The Components of a Company’s Macro-
Environment

1-177
1-178
Strategic Management
 What Is Situation Analysis?
◆ Two considerations

➔ Company’s external or
macro-environment
◼ Industry and competitive conditions

➔ Company’s internal or
micro-environment
◼ Competencies, capabilities,
resource strengths and weaknesses,
and competitiveness

1-179
Strategic Management
 SWOT Analysis

1-180
 The Three Steps of SWOT Analysis

1-181
Strategic Management
1-182
 Mckinsey 7S Model

1-183
 The Five Forces Model of Competition

1-184
Strategic Management
1-185
 Example: Strategic Group Map
of Selected Retail Chains

1-186
 SESSION-III

1-187
 Competencies vs. Core Competencies
vs. Distinctive Competencies
◆ A competence is the product of organizational learning and experience and
represents real proficiency in performing an internal activity

◆ A core competence is a well-performed

internal activity central (not peripheral or incidental)
to a company’s competitiveness and profitability

◆ A distinctive competence is a competitively valuable activity a company performs

better than its rivals

1-188
Strategic Management
 Examples: Core Competencies
◆ Expertise in integrating multiple technologies
to create families of new products
◆ Know-how in creating operating systems
for cost efficient supply chain management
◆ Speeding new/next-generation products to market

◆ Better after-sale service capability

◆ Skills in manufacturing a high quality product

1-189
 Examples: Distinctive
Competencies
◆ Sharp Corporation
➔ Expertise in flat-panel display technology

◆ Toyota and Honda

➔ Low-cost, high-quality manufacturing
capability and short design-to-market cycles
◆ Intel
➔ Ability to design and manufacture
ever more powerful microprocessors for PCs
◆ Wal-Mart
➔ Low-cost distribution and use of
state-of-the-art retail technology

1-190
Strategic Management
 What Is
“Competitive Strategy”?
◆ Deals exclusively with a company’s
business plans to compete successfully
➔ Specific efforts to please customers

➔ Offensive and defensive moves

to counter maneuvers of rivals

➔ Responses to prevailing market conditions

➔ Initiatives to strengthen its market position

◆ Narrower in scope than business strategy

1-191
1-192
Strategic Management
1-193
Strategic Management
1-194
Strategic Management
1-195
Strategic Management
1-196
Strategic Management
 The Concept of a
Company Value Chain
◆ A company’s business consists of all activities undertaken in designing,
producing, marketing, delivering, and supporting its product or service
◆ A company’s value chain consists of a linked set of value-creating
activities performed internally
◆ The value chain contains two types of activities

➔ Primary activities – where most of

the value for customers is created
➔ Support activities – facilitate
performance of the primary activities

1-197
 Company Value Chain

1-198
1-199
 Characteristics of
Value Chain Analysis
◆ Combined costs of all activities in a company’s value chain
define the company’s internal cost structure

◆ Compares a firm’s costs activity

by activity against costs of key rivals

➔ From raw materials purchase to

➔ Price paid by ultimate customer

◆ Pinpoints which internal activities are a

source of cost advantage or disadvantage
1-200
1-201
Strategic Management
 Strategic Management
1-202
1-203
 Low-Cost Provider Strategies
Keys to Success
◆ Make achievement of meaningful lower costs
than rivals the theme of firm’s strategy
◆ Include features and services in product
offering that buyers consider essential
◆ Find approaches to achieve a cost advantage
in ways difficult for rivals to copy or match

Low-cost leadership means low

overall costs, not just low
manufacturing or production costs!
1-204
 Approach 1: Controlling
the Cost Drivers
◆ Manage costs of key resource inputs
◆ Consider linkages with other activities in value chain
◆ Find sharing opportunities with other business units
◆ Compare vertical integration vs. outsourcing
◆ Assess first-mover advantages vs. disadvantages
◆ Control percentage of capacity utilization
◆ Make prudent strategic choices related to operations

1-205
Strategic Management
 Approach 2: Revamping
the Value Chain
◆ Make greater use of Internet technology applications
◆ Use direct-to-end-user sales/marketing methods
◆ Simplify product design
◆ Offer basic, no-frills product/service
◆ Shift to a simpler, less capital-intensive, or more flexible technological
process
◆ Relocate facilities closer to suppliers or customers
◆ Drop “something for everyone” approach and focus on a limited
product/service

1-206
Strategic Management
 Pitfalls of Low-Cost Strategies
◆ Being overly aggressive in cutting price

◆ Low cost methods are easily imitated by rivals

◆ Becoming too fixated on reducing costs

and ignoring
➔ Buyer interest in additional features
➔ Declining buyer sensitivity to price
➔ Changes in how the product is used
◆ Technological breakthroughs open up cost reductions
for rivals

1-207
Strategic Management
 Differentiation Strategies
Objective
◆ Incorporate differentiating features that cause buyers to
prefer firm’s product or service over brands of rivals

Keys to Success
◆ Find ways to differentiate that create value for buyers and
are not easily matched or cheaply copied by rivals

◆ Not spending more to achieve differentiation

than the price premium that can be charged

1-208
Strategic Management
 Benefits of Successful
Differentiation
A product / service with unique, appealing
attributes allows a firm to
➔ Command a premium price and/or
➔ Increase unit sales and/or
➔ Build brand loyalty Which
hat is
unique?
= Competitive Advantage

1-209
Strategic Management
 How to Achieve a
Differentiation-Based Advantage
Approach 1
Incorporate product features/attributes that
lower buyer’s overall costs of using product
Approach 2
Incorporate features/attributes that raise the
performance a buyer gets out of the product
Approach 3
Incorporate features/attributes that enhance buyer
satisfaction in non-economic or intangible ways
Approach 4
Compete on the basis of superior capabilities
1-210
 Best-Cost Provider Strategies
◆ Combine a strategic emphasis on low-cost with a
strategic emphasis on differentiation
➔ Make an upscale product at a lower cost
➔ Give customers more value for the money
Objectives
◆ Deliver superior value by meeting or exceeding
buyer expectations on product attributes and beating
their price expectations
◆ Be the low-cost provider of a product with good-to-
excellent product attributes, then use cost advantage
to under price comparable brands
1-211
 Risk of a Best-Cost
Provider Strategy
◆ A best-cost provider may get squeezed between strategies of
firms using low-cost and differentiation strategies

➔ Low-cost leaders may be able to siphon

customers away with a lower price

➔ High-end differentiators may be able to

steal customers away with better product attributes

1-212
Strategic Management
 Focus / Niche Strategies
◆ Involve concentrated attention on a narrow piece of
the total market
Objective
Serve niche buyers better than rivals

Keys to Success
◆ Choose a market niche where buyers have distinctive
preferences, special requirements, or unique needs
◆ Develop unique capabilities to serve needs of target
buyer segment
1-213
 Approaches to Defining
a Market Niche

◆ Geographic uniqueness

◆ Specialized requirements in
using product/service

◆ Special product attributes

appealing only to niche buyers

1-214
Strategic Management
 Focus / Niche Strategies
and Competitive Advantage

Approach 1
◆ Achieve lower costs than
rivals in serving the segment --
A focused low-cost strategy

Which
Approach 2 hat is
unique?
◆ Offer niche buyers something
different from rivals --
A focused differentiation strategy
1-215
 Deciding Which Generic
Competitive Strategy to Use
◆ Each positions a company differently in its market
◆ Each establishes a central theme for how a company will endeavor to
outcompete rivals
◆ Each creates some boundaries for maneuvering as market
circumstances unfold
◆ Each points to different ways of experimenting with the basics of the
strategy
◆ Each entails differences in product line, production emphasis,
marketing emphasis, and means to sustain the strategy

The big risk – Selecting a “stuck in the middle” strategy!

This rarely produces a sustainable competitive
advantage or a distinctive competitive position.
1-216
 SESSION-IV

1-217
 Corporate – Level Strategy

• Specifies actions taken by the firm to gain a

competitive advantage.

• Done by selecting and managing a group of

different businesses competing in several
industries and product markets.

• It is a company wide process.

1-218
Strategic Management
 Purpose
❖To identify :
– The worth of the company.

– Field in which the company will sustain.

– The management process to be followed in

managing the group of businesses.

1-219
Strategic Management
 Diversification Levels

1-220
Strategic Management
 Types of diversification

1-221
Strategic Management
 Reasons for diversification
• Value-Creation –Economies of scope, Market power,
Financial economies

• Value-Neutral-Risk resources, regulations, cash flows

• Value-Reducing-Employment risk, Increasing

managerial compensation.

1-222
Strategic Management
 Value creation diversification

1-223
Strategic Management
 Unrelated diversification
❖ Financial Economies
– Are cost savings realized through improved
allocations of financial resources
– Based on investments inside or outside the firm
❖ Create value through two types of financial
economies:
– Efficient internal capital allocations
– Purchasing other corporations and restructuring
their assets

1-224
Strategic Management
 Value neutral diversification
• Incentives to diversify:
➢ External Incentives
❖ Antitrust regulations
❖ Tax laws

➢ Internal Incentives
❖ Low performance
❖ Uncertain future cash flows
❖ Synergy and Firm Risk Reduction

• Value creation is determined more by appropriate use of

resources than by incentives to diversify

1-225
Strategic Management
 Diversification and firm performance

1-226
Strategic Management
 What Is the Motivation
for Competing Internationally?

Gain access to Obtain access to

new customers valuable natural
resources
Help
achieve
lower costs
Spread
Capitalize
business risk
on core
across wider
competencies
market base
1-227
 Strategic Choices
◆ Acquisition
◆ Restructuring-Downsizing, Downscoping
◆ LBO
◆ Strategic Alliance
◆ Merger & Acquisition
◆ Outsourcing
◆ Joint Venture
◆ Exporting and Licensing

1-228
Strategic Management
 Offensive and Defensive
Strategies
Offensive Strategies Defensive Strategies

Used to build new or stronger Used to protect competitive

market position and/or create advantage (rarely used to
competitive advantage create advantage)

1-229
 Types of Offensive Strategies
1. Initiatives to match or exceed competitor strengths

2. Initiatives to capitalize on competitor weaknesses

3. Simultaneous initiatives on many fronts

4. End-run offensives

5. Guerrilla offensives

6. Preemptive strikes

1-230
Strategic Management
 Defensive Strategy
Objectives
◆ Lessen risk of being attacked
◆ Blunt impact of any attack that occurs
◆ Influence challengers to aim attacks at other rivals

Approaches
◆ Block avenues open to challengers
◆ Signal challengers vigorous
retaliation is likely

1-231
Strategic Management
 SESSION-V

1-232
 International vs. Global
Competition
Company operates in a select
few foreign countries, with
International modest ambitions to expand
Competitor further

Company markets products in

50 to 100 countries and is
Global expanding operations into
Competitor additional country markets
annually

1-233
Strategic Management
1-234
Strategic Management
 Characteristics of
Multi-Country Competition
◆ Market contest among rivals in one country not closely
connected to market contests in other countries
◆ Buyers in different countries are
attracted to different product attributes
◆ Sellers vary from country to country
◆ Industry conditions and competitive forces in
each national market differ in important respects
Rival firms battle for national championships –
winning in one country does not necessarily signal
the ability to fare well in other countries!
1-235
 Characteristics of
Global Competition
◆ Competitive conditions across
country markets are strongly linked
➔ Many of same rivals compete in
many of the same country markets
➔ A true international market exists

◆ A firm’s competitive position in one country is

affected by its position in other countries
◆ Competitive advantage is based on a firm’s world-
wide operations and overall global standing
Rival firms in globally competitive industries
vie for worldwide leadership!
1-236
 Strategy Options for
Competing in Foreign Markets

◆ Exporting

◆ Licensing

◆ Franchising strategy

◆ Multi-country strategy

◆ Global strategy

◆ Strategic alliances or joint ventures

1-237
 Strategic Alliances and
Collaborative Partnerships
Companies sometimes use strategic
alliances or collaborative
partnerships to complement their
own strategic initiatives and
strengthen their competitiveness.
Such cooperative strategies go
beyond normal company-to-
company dealings but fall short of
merger or full joint venture
partnership.

1-238
Strategic Management
 Why Are Strategic Alliances
Formed?
◆ To collaborate on technology development or new
product development
◆ To fill gaps in technical or manufacturing expertise

◆ To acquire new competencies

◆ To improve supply chain efficiency

◆ To gain economies of scale in

production and/or marketing
◆ To acquire or improve market access via joint
marketing agreements
1-239
Strategic Management
 Why Alliances Fail
◆ Ability of an alliance to endure depends on
➔ How well partners work together
➔ Success of partners in responding
and adapting to changing conditions
➔ Willingness of partners to
renegotiate the bargain
◆ Reasons for alliance failure
➔ Diverging objectives and priorities of partners
➔ Inability of partners to work well together
➔ Changing conditions rendering purpose of alliance obsolete
➔ Emergence of more attractive technological paths
➔ Marketplace rivalry between one or more allies

1-240
Strategic Management
 Merger and Acquisition Strategies

◆ Merger – Combination and pooling of equals, with newly

created firm often taking on a new name
◆ Acquisition – One firm, the acquirer, purchases and absorbs
operations of another, the acquired
◆ Merger-acquisition
➔ Much-used strategic option
➔ Especially suited for situations where
alliances do not provide a firm with needed
capabilities or cost-reducing opportunities
➔ Ownership allows for tightly integrated operations, creating more
control and autonomy than alliances
1-241
 Objectives of Mergers
and Acquisitions
◆ To pave way for acquiring firm to gain more market share and
create a more efficient operation
◆ To expand a firm’s geographic coverage

◆ To extend a firm’s business into new product

categories or international markets
◆ To gain quick access to new technologies

◆ To invent a new industry and lead the convergence of

industries whose boundaries are blurred by changing
technologies and new market opportunities
1-242
1-243
Strategic Management
 Vertical Integration Strategies
◆ Extend a firm’s competitive scope within
same industry
➔ Backward into sources of supply
➔ Forward toward end-users of final product
◆ Can aim at either full or partial integration

Internally Activities, Costs,

Activities,
Performed & Margins of Buyer/User
Costs, &
Activities, Forward Channel Value
Margins of
Costs, & Allies & Chains
Suppliers
Margins Strategic Partners

1-244
 Types of Offensive Strategies
1. Initiatives to match or exceed competitor strengths

2. Initiatives to capitalize on competitor weaknesses

3. Simultaneous initiatives on many fronts

4. End-run offensives

5. Guerrilla offensives

6. Preemptive strikes
1-245
 Defensive Strategy
Objectives
◆ Lessen risk of being attacked
◆ Blunt impact of any attack that occurs
◆ Influence challengers to aim attacks at other rivals

Approaches
◆ Block avenues open to challengers
◆ Signal challengers vigorous
retaliation is likely

1-246
Strategic Management
 Matching Strategy to a
Company’s Situation

Nature of industry
and competitive
Most important
conditions
drivers shaping a
firm’s strategic
Firm’s
options fall into
competitive
two categories capabilities,
market position,
1-247
best opportunities
 10 Commandments for Crafting
Successful Business Strategies
1. Always put top priority on crafting and executing
strategic moves that enhance a firm’s competitive
position for the long-term and that serve to establish it as
an industry leader.

2. Be prompt in adapting and responding to changing

market conditions, unmet customer needs and buyer
wishes for something better, emerging technological
alternatives, and new initiatives of rivals. Responding
late or with too little often puts a firm in the precarious
position of playing catch-up.

1-248
Strategic Management
 10 Commandments for Crafting
Successful Business Strategies
3. Invest in creating a sustainable competitive advantage, for it is a most
dependable contributor to above-average profitability.
4. Avoid strategies capable of succeeding only in the best of circumstances.
5. Don’t underestimate the reactions and the commitment of rival firms.
6. Consider that attacking competitive weakness is usually more profitable
than attacking competitive strength.
7. Be judicious in cutting prices without an established cost advantage.

1-249
Strategic Management
 10 Commandments for Crafting
Successful Business Strategies
8. Employ bold strategic moves in pursuing differentiation strategies so
as to open up very meaningful gaps in quality or service or advertising
or other product attributes.
9. Endeavor not to get “stuck back in the pack” with no coherent long-
term strategy or distinctive competitive position, and little prospect of
climbing into the ranks of the industry leaders.
10. Be aware that aggressive strategic moves to wrest crucial market share
away from rivals often provoke aggressive retaliation in the form of a
marketing “arms race” and/or price wars.

1-250
Strategic Management