UNDERSTANDING STRATEGIES

Goals
Profitability: measured as product of 2 ratios: Revenues Expenses * Revenues Revenues Investment investment refers to shareholders investment profitability refers to long run profits Focus of CEOs may differ e.g. Jack Welch stressed on sales revenue as important component for profitability

Goals
Maximising shareholder value: here, maximising implies that there is a way of finding maximum amount that company earns, which is not the case profit maximisation requires calculation of marginal costs and demand curve and generally managers do not know about it clearly course of action adopted in any case has to be ethical and consistent with corporations other goals

Goals
Risk: degree of risk-taking varies with personalities of different managers managements primary responsibility is to preserve company assets with profitability as a second goal Multiple Stakeholder Approach: organisations participate in 3 markets: capital, product and factor markets management should identify goals for each of these stakeholders and track their performance

Concept of Strategy
Strategy describes general direction in which an organisation plans to move to attain its goals A firm develops strategies by matching its core competencies with industry opportunities Strategies can be found at: corporate level and business-unit level Corporate level strategies plan right mix of industries in present and future for the company Business-unit Strategy talks about mission and the methodology involved behind achieving it

Corporate Level Strategy

Corporate strategic analysis results in decisions like businesses to add or retain, businesses to emphasize or de-emphasize etc. Single Industry Firms: e.g. Infosys in Softwares, Wrigley Chewing Gum, Nucor Steel etc. Unrelated Diversified Firms: operating synergies across businesses based on common core competencies and on sharing of common resources are very low e.g. Tata Empire

Corporate Level Strategy

Related Diversified Firms: common resources like sales force, manufacturing facilities, procurement function can be shared e.g. Procter and Gamble firms grow by leveraging core competencies developed in one business when they diversify such firms grow internally through R & D In such firms, Chief Executive must make resource allocation decisions across business units and also identify, deepen & leverage corporate core competencies to benefit multiple units

Corporate Level Strategy

Core Competency and Corporate Diversification: research has shown that on average, related diversified firms perform the best, single industry firms next best and unrelated diversified firms do not perform well over the long term business units of a related diversified firm might be worse if they were split into separate companies Implications of control system design: how does structure & form of control differ across different types of firms ?

Business Unit Strategies

Strategy here depends on two interrelated aspects: mission and competitive advantage for every company Business unit mission: BCG Matrix
Star Hold Cash Cow Harvest Question mark Build Dog Divest

Business Unit Strategies

Components of BCG Matrix: Build: increase market share at expense of short-term earnings and cash flow Hold: protect business-units market share and competitive position Harvest: maximise short-term earnings and cash-flow, even at expense of market share Divest: withdraw from the business either through process of slow liquidation or outright sale

Business Unit Strategies

BCG matrix mainly takes market share as primary strategy variable due to importance placed on experience curve According to BCG matrix, cost per unit decreases predictably with number of units over time Association between market share and profitability has also been empirically supported by Profit Impact of Market Strategy Database Control system designers need to know what is mission of particular business unit

Business Unit Strategies

Although experience curve is a powerful analytical tool, it has limitations like: concept applies to undifferentiated products in certain situations improvements in process technology may have greater impact on per-unit cost reduction than cumulative volume Aggressive pursuit of reducing cost can lead to loss of flexibility in the marketplace not suitable for new technologies in industry along with experience, other cost drivers are scale, scope, technology and complexity

Business Unit Strategies

General Electric Company/Mckinsey & Co. grid differs in methodology from BCG matrix: industry attractiveness in GE grid is based on weighted judgements about factors like market size, market growth, entry barriers, etc. GE grid uses multiple factors like market share, distribution strengths and engineering strengths to assess competitive position of business unit BCG uses industry growth rate as a proxy for industry attractiveness and relative market share as proxy for current competitive position

Business Unit Competitive Advantage

Michael Porter has described two analytical approaches industry analysis and value chain analysis to develop a superior and sustainable competitive advantage Industry analysis: intensity of rivalry among existing competitors bargaining power of customers bargaining power of suppliers threat from substitutes threat of new entrants

Business Unit Competitive Advantage

Observations with regard to industry analysis: more powerful five forces, less profitable an industry is likely to be depending on relative strength of five forces, key strategic issues facing business unit will differ from one industry to another understanding nature of each force helps the firm to formulate effective strategies Generic competitive advantage: low cost differentiation

Business Unit Competitive Advantage

Industry analysis: New entrants Industry competitors

Suppliers

Customers

Substitutes

Business Unit Competitive Advantage

Value chain analysis: competitive advantage in market place derives from providing better customer value for an equivalent cost or equivalent customer value for a lower cost value chain is complete set of activities involved in a product, from extraction of raw material and ending with post delivery support to customers firms within same industry vary in proportion of activities that they carry with own resources

Business Unit Competitive Advantage

for each value-added activity, key questions are: 1. can we reduce costs, holding revenues constant 2. can we increase revenue, holding costs constant 3. can we reduce assets, holding costs and revenue constant 4. Most importantly, can we do (1), (2) and (3) simultaneously Value chain framework breaks down the chain from basic raw materials to end-use customers into specific activities to understand cost behaviour and sources of differentiation

Business Unit Competitive Advantage

Value chain helps the firm to understand the entire value delivery system Supplier/customer actions can significantly influence firms cost/differentiation position
Cost-CumDifferentiation Advantage Low-Cost Advantage Differentiation Advantage Stuck-In-themiddle