Chapter 3 Strategic management Internal environment analysis Nature and types of resources 1.

Tangible resources Financial resources: firms borrowing capacity and its ability to generate internal funds Organizational resources: formal information system, formal planning and controlling and coordinating system Physical resources: sophistication and location of the firms plant and equipment and access to raw materials Technical resources: include stock technology, such as patents, trade mark, copyright, trade secrets 2. Intangible resources: Human resources: knowledge, skills, commitment, managerial and leadership capability and ability to work hard Innovational resources: ideas, scientific capabilities and capacity to innovate Reputational resources: relations with customers, popular brands, customers perceptions of product quality, durability and reliability. These resources also refer to the efficient, effectiveness, supportive, and mutuality beneficial interactions and relationships. Components of internal environment Organizational objectives Organizational policies Organizational resources Organizational capabilities Organizational culture Organizational structure

Using resources for strategic advantage

Process/ steps of resource analysis for strategic advantage Identify the firms resource in terms of strength and weakness Combining strength with the firms specific capabilities Appraise the profit potential Select the best strategy Identify resource gap and invest in upgrading weaknesses

Analyzing and understanding strategic capability Resource audit: o Resources are easy to imitate o Resources that are difficult to imitate o Competencies that are easy to imitate o Competencies that are difficult to imitate Assessing competence Assessing balance Identifying key issues
Resource audit

Competences In separate activities Through linking activities

Some are
Comparisons Core competencies Rigidities Preventing change To outperform competition To create new opportunities Historical Industry norms Bench-marking

Assessing balance Resources Competencies Business units

Identifying key issues SWOT analysis Critical success factors

Understanding strategic capability

Analyzing strategic capability Threshold resources Unique resources

Features of unique resources Valuable Non-substitutable Costly to imitate Rare

Same as competitors Resources Competencies Necessary resources Threshold competencies

better than competitors Unique resource Core competencies

Techniques of internal analysis Value chain analysis Cost efficiency analysis Product features analysis Comparative analysis 1. Strategic advantage profile (SAP) The strategic advantage profile is a tool for making a systematic evaluation of the enterprises internal factors which are significant for the company in its environment Janch and Glueck

Process of preparing SAP

Identify key strategic factors Identify strategic importance of key factors Assessing strength and weaknesses Preparing strategic advantage profile

Strategic advantage profile (SAP) for Gemini food products Internal factors Strengths: Favorable image High quality Experienced management Extensive channel networks Sound financial position Weaknesses: Poor research and development Limited product mix Raw materials shortage Poor employee development Lack of countrywide orientation Total weight .10 .20 .05 .05 .10 Ratings 5 4 3 3 2 Weighted score .50 .80 .15 .15 .20 comments Provides strategic advantage Key to success Pioneer in food business Good relatons Good but heavy debt Slow on new products Customer needs not meet Increasing imports High staff turnover Weak in rural area

.15 .15 .10 .05 .05

3 3 4 2 1

.30 .45 .40 .10 .05

1.00

3.10

2. Value chain analysis Primary activities Inbound logistics: Operations Outbound logistics Marketing and sales Services

Support activities Procurement Technology development Human resource management infrastructure

Firm infrastructure Human resource management Technology development Procurement margin

Service Inbound operations outbound logistics marketing And sales Logistics Primary activities margin

3. Bench marking:
Process of benchmarking Identify the area to be examined Find behavioral and output measure of the areas Select an accessible set of competitors and best in class Calculate the differences among the countrys performance measurement Develop technical programs for closing performance gaps Implement the progress and then compare the resulting new measurements

Chapter 4 Strategy formulation SWOT Analysis SWOT analysis is necessary to: Analyze opportunities To understand market threats To identify strength of the organization To know the weaknesses of the organization

Resource based view of SWOT analysis Numerous environmental opportunities

Cell 3: supports a turnaround oriented Strategy

cell 1: supports as aggressive strategy

critical Weaknesses Cell 4: supports a defensive Strategy cell 2: supports a diversification strategy

Substantial internal strength

major environmental threats

1. Aggressive or growth-oriented strategy: cell 1 where numerous opportunities and substantial strength of the organization 2. Diversification strategy: cell 2 where numerous opportunities and substantial threats 3. Turnaround strategy: cell 3 critical internal weaknesses and numerous opportunities 4. Defensive strategy: cell 4 major environmental threats and critical internal weaknesses

Corporate strategy Corporate directional strategy 1. Growth strategy: Concentration strategy: Vertical Horizontal Diversification strategies: Concentric or related diversification

Conglomerate or unrelated diversification 2. Stability strategies: a. pause/proceed with caution strategies b. No change strategies c. Profit strategy 3. Retrenchment strategies Turnaround strategy Captive company strategy: give company on contract to save the face and for survival Sell-out or divestment strategy Bankruptcy or liquidation strategy

Growth Stability Concentration Caution Vertical growth No change Horizontal growth Profit Diversification Bankruptcy/liquidation Concentric Conglomerate Sell-out/divestment Captive company Turn around Retrenchment

Combination strategy: Retrenchment and expansion are combined if different parts of the organization. Simultaneous combination: Applied same time in different business Sequential combination: Applied at different times in same business Simultaneous and sequential: Combination of both Cooperative and collaborative strategies: Cooperative strategies: Merger Acquisition

Collaborative strategies: Joint-venture Strategic alliance Business strategies 1. Porters competitive strategies 2. Strategic clock strategy 1. Porters competitive strategy: a. Low cost leadership strategy Ways of reducing costs: Control cost drivers: drive down the cost of the value chain activities by doing a better job than competitors Revamp value chain: by-pass some cost-producing activities Controlling cost drivers to reduce costs: a. Economies of scale b. Experience curve c. Cost of key resources d. Resource sharing e. Outsourcing f. Capacity utilization g. First mover advantage h. Integration Revamp value chain a. Shifting to E-business b. Direct marketing c. Simplify product design d. Non-frills offers e. Reallocate facilities f. Reengineering Conditions for success of low-cost leadership strategy Vigorous price competition: Standardized product Low product differentiation Price sensitiveness Low switching costs

Buyer power b. Broad differentiation strategy Base of differentiation Product parameters: size, shape, design, features, quality, performance Service back-up: delivery, installation, repair, training, availability of spare parts Personnel: better and experienced personnel to serve the customers Promotion: Using differentiating claims in promotions appeals Image: Projecting organization or brand image

Drivers of differentiation
Unique product performance Unique product features New technologies Unique services Detailed information Conditions for success of broad differentiation strategy Many ways to differentiate Diverse needs and uses Fast technological change Buyers are less sensitive to price c. Best cost provider strategy Benefits: this strategy provides better products at low price Risks: strategy faces competition from both low cost providers and product differentiation providers. It may get squeezed between these two strategies. d. Focused strategy Niche can be defined by: Demographic characteristics: Geographical uniqueness Specialized requirements Special product attributes There are two types of focused low cost strategy: focused low cost, focused differentiation Conditions for success of focused strategy Niche should be big enough in size to be profitable Major competitors are not interested in the niche Customers are unique in terms of specialized requirements and unique preferences The niche should be suited to resources and competencies of the focuser There should be no overcrowding in the same niche of the segment Customers are loyal. They are willing to pay higher prices Strategic clock-oriented market-based generic strategic

High 3 4 5

2 Perceived added value 1 8 Low Low price

high

1. No frills strategy: It combines low price with low prescribed added value. It focuses on price sensitive market segment. Quality is not a concern. 2. Low price strategy: It combines low price and similar perceived added value relative to competencies. It focuses on low price without lose of quality. 3. Hybrid strategy: It combines low price with differentiation relative to competitions. It requires a low cost base which competitors cannot match. Customers should perceive high added value. It requires greater sales volume, focused market segment, and core competencies. 4. Differentiation strategy: it provides product of unique dimensions with high perceived added value. Differentiation can be without premium or with price premium. The aim to achieve higher market share by offering better products at same price or higher price. It can be through. Uniqueness or improvement in products Marketing through power of brand or aggressive promotion Core competencies that provide competitive advantage The organization should clearly identify who are its target customers, what is valued by customers and who are the competitors. 5. Focused differentiation strategy: It combines high price with high perceived added value. It focuses on a selected market segment. Customers are willing to pay premium price. 6. Increased price with standard value strategy: This strategy combines high price with standard perceived added value. This is found in monopoly situation. It is risk of losing market share. It is destined to fail.

7. Increased price with low value strategy: this strategy combines high price with low perceived added value. This is also possible in monopoly situations. It is destined to fail. 8. Standard price with low value strategy: this strategy combines standard price with low perceived value added. It leads to loss of market share. It is also destined to fail.

Directions of strategic development

Protect build on current position Withdrawal When an organization is unsuitable to secure the resources or achieve the competence level of the leaders When the intrinsic value of a companys products or assets is subject to changes overtime When an organizations unique resources and core competencies are limited When expectation of a dominant stakeholder is not that very high When a firm is having short-term expectation When an organization itself withdraws from a market by licensing the rights to other organizations

Consolidation A high-market-share firm can develop a strategy of higher price/quality then lowshare competitors High market share is the result of quality, innovation, experience and intellectual property The consolidation of high market share and high product quality will provide sustained competitive advantages over the competition There will be a combined effect of marketing expenditure and product quality on return on investment More market share means that more return from the market will encourage capital investment Consolidation strategy may be harvesting i.e. gaining the maximum pay-off from its strong position. Market penetration Growing overall market Sacrifice profit margin In the situation of competency of the market leaders Product development

 Developing new product features, such as, Adapt (other ideas and developments) Modify (color, motion, sound, shape) Magnify (stronger, longer, thicker, extra value) Minify (smaller, shorter, lighter) Substitute (other ingredients, process, power) Rearrange (other patterns, layout, sequence, components) Reverse (inside out) Combine (blind, alloy, assortment, ensemble, combine units, purposes, appeals, ideas) Developing quality variations Developing additional models and sizes ( product proliferation

Product development is done in two ways:

a. On existing competence b. On new competence Market development The main strategic activities of market development include the following: 1. Opening additional geographic markets: three necessary elements to consider while going for global participation which are as follows: a. Global market share: when a firm concentrates on a small number of locations with the low-cost and high quality strategy, it can be beneficial in comparison to its competitors. b. Global balance: a high market share of the product makes a global balance of revenue and thus will be beneficial for the firm, Japanese and Chinese are getting a high amount of global balance of revenue than Americans and Europeans in some products c. Globally strategic markets: there are some markets that are known as globally strategic markets. For Americans, Chinese and Indian markets are globally strategic markets because of their huge population. Some markets are globally important because of being a source of industry innovation. For example, American market is strategic for computer software and UK is for popular music. 2. Extension into a new market segment: 3. Development of new uses of existing products

Criteria of strategic choice 1. Suitability: Some useful frameworks for understanding the suitability are Ranking, Decision tree and scenarios. a. Ranking: b. Decision tree:
Growth investment and diversification high yes Growth no Low yes no high low no 5. Convert some factories to cake manufacture 6. Convert to new product range 7. Substitute some manufacture for buying in cakes 8. Same as (7) but both sweets yes no yes 3. Purchase cakes etc and distribute 4. Purchase complementary sweet products examples of alternatives 1. Manufacture cakes etc 2. Strengthen distribution, buy, more outlets

Present business (sweet manufacturer and wholesaler

No growth

c. Scenario 2. Acceptability a. Return analysis 1. Profitability analysis Return on capital employed Payback period Discounted cash flow Cost benefit analysis Real options based approaches 0.0
Low Never invest Probably never Invest

value to cost 1.0

invest now

may be invest now

Volatility

May be invest May be invest later Later

High

Shareholders value analysis (SAV) Analyzing risk Financial ratio Liquidity ratio o Current ratio o Quick (acid test) ratio Profitability ratios Activity ratios Leverage ratios Other ratios Sensitivity analysis Simulation modeling: copying the probable situations positions. We make the exact situation artificially and see the impact of environment. Heuristic models: problems as well as the solutions are identified in this techniques. Availability heuristic Representativeness heuristic 3. Feasibility Funds flow analysis Identification of sources Identification of uses Identification and funding of shortfall Break-even analysis Resource deployment analysis Portfolio analysis BCG matrix (Boston Consulting Group) High Star modest +or cash flow market share low question mark large negative Cash flow Growth 100% (Cash use) cash cow large positive Low cash flow dog modest + or cash flow

High

High 1. 2. 3. 4.

1.0

low

Star( high growth-high market share) Cash cow (low growth-high market share) Dog (low growth-low market share) Question mark (high growth-low market share)

General Electric (GE) business screen It was developed by General Electric Company. It uses relationship between market attractiveness and competitive position. It focuses on the potential success of SBUs. The indicators of : Market attractiveness Market size and growth rate Cyclicality Competitive structure Barriers to entry Industry profitability Technology Inflation Regulation Workforce availability Political, legal, social environmental issues Competitive position Market share Marketing and sales force Research and development Manufacturing Distribution Financial resources Competitive position regarding: Image Product line Customer service

Cell 1,2,4 invest grow: SBUs in these cells are overall successful. They should be given priority in portfolio. More investment should be allocated. Cell 3,5,7 grow or let go: SBUs in these cells have medium success and attractiveness. They should be included in the portfolio on a selective basis for investment Cell 6,8,9 harvest/divest: SBUs in these cells have low success and attractiveness, they should be divested or closed down.

GE matrix is divided into nine cells:

Competitive position

Strong High 1 Market attractiveness Medium

selective growth

medium
selective growth

weak
grow or let go

Invest

grow of let go

harvest

Low

grow or let go

harvest

divest

Hofers matrix This matrix analyses SBUs in terms of competitive position and stage of product/market evolution. The stage of the product life cycle describes the market situation. The competitive position can be strong, average, and weak. The strategic guidelines can be: Push: Invests aggressively: for cells 1,2,4,5,7 Caution: Invest selectively: for cells 3,6,8,10,11 Danger: harvest For cells: 9,12,13,14,15

Competitive position Strong average weak

Development Growth

1 4

2 5

3 6

Stage of product/market evolution

shake-out

Maturity

10 13 14

11

12 15

decline