PAN African e-Network Project

Diploma in Business Management

Strategic Management
Semester - I
Session - 5

Vivek Singh Tomar

Scenario planning is well suited to the task of dealing with

paradigmatic, non-linear change

Methods of Constructing Scenarios

1-Highly Qualitative Procedures
2-Practical Procedures
3-Cross-Impact Analysis

1-Highly Qualitative Procedures

Kahn: -A simplistic intuition or an expression of

bias rather than a careful synthesis and

balancing of the analysis with more
subtle qualitative considerations.
-Surprise-free scenario
Godet: -Exploratory Prospective Analysis
-Holistic and integrative analysis
Durand: -Intuitive analysis
Critic: They rely so heavily on intuitive and subjective
analysis that they are difficult to implement.

2-Practical Procedures
More practical means of generating scenarios
in business environment:
-Identifying factors are expected to affect forecasting
situation at hand.
-Postulating a set of plausible future values for each
of these factors.
-Selecting a few plausible scenarios from a large
number of possible combinations of the values of
these factors.

Two Approaches on selecting strategies:

-Deductive
-Inductive

3-Cross-Impact Analysis
Emerged from early work on the Delphi Technique
Its Basic philosophy of Cross-Impact is that no
development occurs in isolation. Rather, it is rendered
more or likely by the occurrence of other events.
Cross-Impact attempts to capture these crossimpacts from the judgmental estimates of experts.
Data from experts are then input into a computer
simulation or mathematical program.
Critic: Judgmental estimates are surely not amenable to
any mathematical machinations.

Few Comments on Scenarios

1.
2.

3.

The most important part of scenario analysis is to think

about the problem.
The most difficult in scenario analysis is how to reduce a
large number of potential future outcomes to a few
plausible scenarios. The number of possible scenarios
grows quickly as the number of factors increases.
Two methods:
-Inductive: If the number of factors is small (<5), examine
every possible scenarios from this set.
-Deductive: When many factors are considered, rather
than examining every possible combination, set the tone
of scenarios. It means to decide whether the scenarios
will represent an optimistic and pessimistic views of the
future, or characterize some dominant themes.

Advantages of Scenario
Scenario writing is a planning instrument.
It is also an effective learning tool.
Thinking in scenarios helps us understand the logic of
developments, clarify driving forces, key factors, key
players and our potential to exert an influence.

It proceeds more from the gut than from the

computer. Although it may incorporate the
results of quantitative models.
It shows a slight accuracy comparing with other
models of forecasting. Specially when
uncertainty is high.

Scenario as powerful instrument

Brain-compatible format: Scenario thinking matches the way
the brain function. Narrative format (images and stories) makes them
easily memorable.

Opening-up of divergent thinking:

By forcing your mind to

think about qualitatively different directions, you train your capability to
think the unthinkable.

Complexity-reducing format: Complex business or general

environments can be reduced to a manageable amount of uncertainty.

Communicative format: Scenarios are easy to communicate

and to discuss.

Weaknesses of Scenario
If scenarios are powerful, why havent they been
more widely used?
Uncertainty in conclusions: It does not give one single answer

about the future. Therefore it does not provide the security that is often
required in decision making.
Counterintuitive to managerial simplicity: It does not
accord with the managerial simplicity that says that there is one right
answer to every question. Scenario planning is a more holistic or
systemic approach to planning than traditional methods.
Soft methods and soft answers: Scenario techniques are
usually qualitative, the results are often presented in qualitative terms
that fir poorly with traditional numbers-oriented cultures.

Time consuming: Workshop-based methods are time consuming

in terms of the number of hours and days the participants need to
spend to get thorough results.

Secrecy: Most of Scenarios adopted in the companies are arcane

and impractical

Scenario Analysis at Shell

Strategy

Shell makes use of a strategic planning process in which a series of

what if scenarios are created
The management at all levels is made to think strategically about the
companys business environment

Shells scenario analysis

Identify trends and their drivers
Develop the what, why and how of different scenarios
Identify parameters to monitor the environment

Testimonial
In early 1986, the price of oil fell to USD
10 per barrel and Shells scenario
analysis proved successful as it was in a
better position than its competitors to
face the situation

Develop contingent strategies to tackle each scenario

Shell has deployed processes and systems to anticipate future scenarios by analyzing the interplay of
environmental factors and its impact on Shells business
Scenario analysis presents complex interactions of future in a simplified, easy to understandable form
By picking the more probable scenarios, the company can brace or prepare itself for exploiting future
opportunities and challenges
It helps the company in formulating strategy and decide the trade-offs required

SWOT Analysis

SWOT Analysis
Identifying
internal strengths (S)
and weaknesses (W)
and also examining
external opportunities (O) and
threats (T)

S
W
O
T

Things
Things the
the company
company does
does well.
well.

Internal

External

Things
Things the
the company
company does
does not
not do
do well.
well.
Conditions
Conditions in
in the
the external
external environment
environment
that
that favor
favor strengths.
strengths.
Conditions
Conditions in
in the
the external
external environment
environment
that
that do
do not
not relate
relate to
to existing
existing strengths
strengths
South-Western
College
Publishing
or
areas
of
or favor
favor
areas
of current
current weakness.
weakness.

Strengths
Strengths and
and Weaknesses
Weaknesses
INTERNAL
INTERNAL

Production Costs
Marketing Skills
Employee Capabilities
Financial Resources
Available Technology
Company/Brand Image

Wal- Mart SWOT Analysis

Strengths

Wal-Mart is powerful retail brand.

Wal-Mart has grown substantially over recent years and has experienced global
expansion.
Wal-Mart has a core competence involving its use of IT to support its international
logistics system.
A focused strategy is in place for HRM and development.

Wal- Mart SWOT Analysis

Weaknesses

Wal- Mart is the Worlds largest grocery retailer and control of its empire,
despite its IT advantages, could leave it week in some areas due to the huge
span of control
Since Wal-Mart sell products across many sectors, it may not have the
flexibility of some of its more focused competitors.
The company is global, but has a presence in relatively few countries
Worldwide.

Opportunities
Opportunities and
and Threats
Threats
EXTERNAL
EXTERNAL
Social

Technological

Demographic

Political/Legal

Economic

Competitive

Wal- Mart SWOT Analysis

Opportunities

To take over, merge with, or form strategic alliances with other global
retailers.
There are tremendous opportunities for future business expansion.
New locations and store types offer Wal-Mart opportunities.
Opportunities exist for Wal-Mart to continue with its current strategy of large,
super centres.

Wal- Mart SWOT Analysis

Threats

Being number one means that Wal-Mart is the target of competition, locally
and globally.
Being a global retailer means that Wal-Mart is exposed to political problems in
the countries where it has operations.
Intense price competition.

Limitations of SWOT Analysis

A SWOT analysis can overemphasize internal

strengths and downplay external threats
A SWOT analysis can be static and can risk
ignoring changing circumstances
A SWOT analysis can overemphasize a single
strength or element of strategy
A strength is not necessarily a source of
competitive advantage

TOWS Matrix

Four Types of Strategies

Threats
Opportunities
Weaknesses
Strengths
(TOWS)

SO
Strategies

WO
Strategies

ST
Strategies

WT
Strategies

SO Strategies
Threats
Opportunities
Weaknesses
Strengths
(TOWS)

SO
Strategies

Use a firms
internal
strengths to
take
advantage of
external
opportunities

WO Strategies
Threats
Opportunities
Weaknesses
Strengths
(TOWS)

WO
Strategies

Improving
internal
weaknesses
by taking
advantage of
external
opportunities

ST Strategies
Threats
Opportunities
Weaknesses
Strengths
(TOWS)

ST
Strategies

Using firms
strengths to
avoid or
reduce the
impact of
external
threats.

WT Strategies
Threats
Opportunities
Weaknesses
Strengths
(TOWS)

WT
Strategies

Defensive
tactics aimed
at reducing
internal
weaknesses
and avoiding
environmental
threats.

Strategy Analysis & Choice

The TOWS Matrix

List the firms key external opportunities

List the firms key external threats
List the firms key internal strengths
List the firms key internal weaknesses

Strategy Analysis & Choice

The TOWS Matrix

Match internal strengths with external opportunities

and record the resultant SO Strategies
Match internal weaknesses with external
opportunities and record the resultant WO Strategies
Match internal strengths with external threats and
record the resultant ST Strategies
Match internal weaknesses with external threats and
record the resultant WT Strategies

TOWS Matrix
Leave Blank

Strengths-S

Weaknesses-W

List Strengths

List Weaknesses

SO Strategies

WO Strategies

List Opportunities

Use strengths to take

advantage of
opportunities

Threats-T

ST Strategies

Overcome
weaknesses by
taking advantage of
opportunities

List Threats

Use strengths to avoid

threats

Opportunities
-O

WT Strategies
Minimize
weaknesses and
avoid threats

Module IV (Strategic Choice)

Generic Strategies Low Cost Leadership,
Differentiation and Focus
Value Chain Analysis
The Value disciplines- Operational Excellence,
Customer intimacy and product Leadership
Grand Strategies Concentrated Growth, Market
development, Product development, Innovation,
Horizontal Integration, Vertical Integration, Concentric
Diversification, Conglomerate Diversification,
Turnaround, Divestiture, Liquidation, Bankruptcy, Joint
Ventures, Strategic Alliances, Consortia, Keiretsus, and
Chaebol

Learning Objectives
1.
2.
3.
4.
5.
6.

Discuss seven different topics for long-term corporate

objectives
Describe the five qualities of long-term corporate
objectives that make them useful to strategic managers
Explain the generic strategies of low-cost leadership,
differentiation, and focus
Discuss the importance of the value disciplines
List, describe, evaluate, and give examples of 15 grand
strategies that decision makers use in forming their
companys competitive plan
Understand the creation of sets of long-term objectives
and grand strategies options
7-32

Long-Term Objectives

Strategic managers recognize that short-run profit

maximization is rarely the best approach to achieving
sustained corporate growth and profitability
To achieve long-term prosperity, strategic planners
commonly establish long-term objectives in seven areas:
Profitability
Productivity
Competitive Position
Employee Development
Employee Relations
Productivity
Tech Leadership
Public Responsibility

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Qualities of Long-Term Objectives

There are five criteria that should be used in

preparing long-term objectives:

Flexible
Measurable
Motivating
Suitable
Understandable

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The Balanced Scorecard

The balanced scorecard is a set of measures that are

directly linked to the companys strategy
Developed by Robert S. Kaplan and David P. Norton,
it directs a company to link its own long-term strategy
with tangible goals and actions.
The scorecard allows managers to evaluate the
company from four perspectives:

financial performance
customer knowledge
internal business processes
learning and growth
7-35

The Balance Scorecard

7-36

Generic Strategies

A long-term or grand strategy must be based on a

core idea about how the firm can best compete in
the marketplace. The popular term for this core
idea is generic strategy.

3 Generic Strategies:
1. Striving for overall low-cost leadership in the industry.
2. Striving to create and market unique products for varied
customer groups through differentiation.
3. Striving to have special appeal to one or more groups
of consumers or industrial buyers, focusing on their
cost or differentiation concerns.
7-37

Low-Cost Leadership

Low-cost producers usually excel at cost

reductions and efficiencies
They maximize economies of scale, implement
cost-cutting technologies, stress reductions in
overhead and in administrative expenses, and
use volume sales techniques to propel
themselves up the earning curve
A low-cost leader is able to use its cost
advantage to charge lower prices or to enjoy
higher profit margins
7-38

Differentiation

Strategies dependent on differentiation are designed to

appeal to customers with a special sensitivity for a
particular product attribute
By stressing the attribute above other product qualities,
the firm attempts to build customer loyalty
Often such loyalty translates into a firms ability to
charge a premium price for its product
The product attribute also can be the marketing
channels through which it is delivered, its image for
excellence, the features it includes, and its service
network
7-39

Focus

A focus strategy, whether anchored in a low-cost base or

a differentiation base, attempts to attend to the needs of
a particular market segment
A firm pursuing a focus strategy is willing to service
isolated geographic areas; to satisfy the needs of
customers with special financing, inventory, or servicing
problems; or to tailor the product to the somewhat unique
demands of the small- to medium-sized customer
The focusing firms profit from their willingness to serve
otherwise ignored or underappreciated customer
segments
7-40

Risks of the Generic Strategies

7-41

Generic Competitive Advantage

Cost Leadership
Differentiation
Focus

Competitive Strategies

Competitive Scope

Competitive Advantage
Lower Cost Differentiation
Cost
Differentiation
Leadership

Broad
Target
Narrow Cost Focus
Target

Differentiation
Focus

Cost Leadership Strategy

Steps to achieve cost leadership
Make cost assignment
Identify cost drivers
Understand cost dynamics
Control cost drivers
Reconfigure the value chain

Operating Cost Assignment

Asset Assignment

Why cost assignment

Understand the firms cost structure

Find cost drivers of each cost segment
Match cost structure to buyers value chain
Configure and reconfigure the cost
structure

Cost Leadership Cost Drivers

Factors affect costs.

Cost Leadership Cost Drivers

Economies or diseconomies of scale
Learning and spillover
Pattern of capacity utilization
When fixed cost high, capacity utilization is
important

Linkages
How other activities are performed
Linkages within the Value Chain
Vertical Linkages

Cost Leadership Cost Drivers

Interrelationships
With other business units within a firm

Integration
Vertical integration in a value activity

Timing

Cost Leadership Cost Drivers

Discretionary policies
Policies that reflect a firms strategy

Location
Institutional factors
e.g., government regulations, financial
incentives, unionization, etc.

Identify Cost Drivers

Cost Dynamics
What cause the change of cost drivers

Cost Dynamics

Industry real growth

Differential scale sensitivity
Different learning rates
Differential technological change
Relative inflation of costs
Aging
Market adjustment

How to Achieve Cost Advantage

Analyze Cost Advantage

Control Cost Drivers

E.g., control scale gain the appropriate
firm size

Reconfigure the Value Chain

Reconfiguration of the value chain presents
the opportunity to fundamentally restructure a
firms cost, compared to settling for
incremental improvements.
By altering the basis of competition in a way
that favors a firms strengths, it may change
the important cost drivers in a way that favors
a firm.

Steps in Strategic Cost Analysis

1. Identify the appropriate value chain and
assign costs and assets to it.
2. Diagnose the cost drivers of each value
activity and how they interact.
3. Identify competitor value chains, and
determine the relative cost of competitors
and the sources of cost differences.
4. Develop a strategy to lower relative cost
position through controlling cost drivers or
reconfiguring the value chain and/or
downstream value.

Cost Focus
A firm dedicates its efforts to a well-chosen
segment of an industry can often lower its
costs significantly.

Differentiation
Emphasize on a unique source of
differentiation in the Value Chain, rather than
on products or markets only
Differentiation base on buyers value, not
only difference that buyers do not value
Should consider the cost of differentiation

Identify Sources of Differentiation

Drivers of Uniqueness
Policy Choices
Linkages
Linkages within the value chain
Supplier linkages
Channel linkages

Timing
Be the first

Location

Drivers of Uniqueness
Interrelationship
Sharing a value activity with sister business units. E.g.,
sharing a sales force for both insurance and other
financial products

Proprietary learning
Integration e.g., integrating online systems to
current ordering systems
Scale
Institutional factors e.g., Madames route

Why buyers purchase?

Purchasing Criteria
User criteria firms to meet them by
lowering cost or raising buyer performance
Signaling criteria telling buyers what
benefits to get

Differentiation for creating

Buyer Value by
Lowering buyer cost
Raising buyer performance
Signaling the value

Through

Linking the firms value chain to the

buyers value chain

Steps in Differentiation
1. Determine who the real buyer is
2. Identify the buyers value chain and the
firms impact on it
3. Determine ranked buyer purchasing
criteria
4. Assess the existing and potential
sources of uniqueness in a firms value
chain

Steps in Differentiation
5. Identify the cost of existing and potential
sources of differentiation
6. Choose the configuration of value activities
that creates the most valuable differentiation
for the buyer relative to cost of differentiating
7. Test the chosen differentiation strategy for
sustainability
8. Reduce cost in activities that do not affect
the chosen forms of differentiation

Other Discussion
Creative Industries
Supply Chain Management
What is Buyers Value Chain?

The Value Disciplines

Product Leadership
Operational Excellence

Companies that pursue the

This strategy attempts to
lead the industry in price and
discipline of product
convenience by pursuing a
leadership strive to
focus on lean and efficient
produce a continuous state
operations
of state-of-the-art products
and services
Customer Intimacy

Customer intimacy means

continually tailoring and
shaping products and
services to fit an increasingly
refined definition of the
customer
7-71

Grand Strategies

Grand strategies, often called master or business

strategies, provide basic direction for strategic
actions
Indicate the time period over which long-rang
objectives are to be achieved
Any one of these strategies could serve as the
basis for achieving the major long-term objectives
of a single firm
Firms involved with multiple industries, businesses,
product lines, or customer groups usually combine
several grand strategies
7-72

Concentrated Growth

Concentrated growth is the strategy of the firm

that directs its resources to the profitable growth
of a dominant product, in a dominant market,
with a dominant technology
Concentrated growth strategies lead to
enhanced performance
Specific conditions favor concentrated growth
The risks and rewards vary

7-73

Market Development

Market development commonly ranks second

only to concentration as the least costly and
least risky of the 15 grand strategies
It consists of marketing present products, often
with only cosmetic modifications, to customers
in related market areas by adding channels of
distribution or by changing the content of
advertising or promotion
Frequently, changes in media selection,
promotional appeals, and distribution are used
to initiate this approach
7-74

Product Development
Product development involves
the substantial modification of
existing products or the creation
of new but related products that
can be marketed to current
customers through established
channels
7-75

Innovation

These companies seek to reap the initially high

profits associated with customer acceptance of a
new or greatly improved product
Then, rather than face stiffening competition as the
basis of profitability shifts from innovation to
production or marketing competence, they search
for other original or novel ideas
The underlying rationale of the grand strategy of
innovation is to create a new product life cycle and
thereby make similar existing products obsolete
7-76

Horizontal Integration

When a firms long-term strategy is

based on growth through the acquisition
of one or more similar firms operating at
the same stage of the productionmarketing chain, its grand strategy is
called horizontal integration
Such acquisitions eliminate competitors
and provide the acquiring firm with
access to new markets
7-77

Vertical Integration

When a firms grand strategy is to acquire

firms that supply it with inputs (such as raw
materials) or are customers for its outputs
(such as warehouses for finished products),
vertical integration is involved
The main reason for backward integration is
the desire to increase the dependability of
the supply or quality of the raw materials
used as production inputs
7-78

Vertical and Horizontal

Integration

7-79

Concentric Diversification

Concentric diversification involves the

acquisition of businesses that are related to
the acquiring firm in terms of technology,
markets, or products
With this grand strategy, the selected new
businesses possess a high degree of
compatibility with the firms current businesses
The ideal concentric diversification occurs
when the combined company profits increase
the strengths and opportunities and decrease
the weaknesses and exposure to risk
7-80

Conglomerate Diversification

Occasionally a firm, particularly a very large one,

plans acquire a business because it represents the
most promising investment opportunity available. This
grand strategy is commonly known as conglomerate
diversification.
The principal concern of the acquiring firm is the profit
pattern of the venture
Unlike concentric diversification, conglomerate
diversification gives little concern to creating productmarket synergy with existing businesses
7-81

Turnaround
The firm finds itself with declining profits

Among the reasons are economic recessions,

production inefficiencies, and innovative breakthroughs
by competitors

Strategic managers often believe the firm can survive

and eventually recover if a concerted effort is made
over a period of a few years to fortify its distinctive
competences. This is turnaround.

Two forms of retrenchment:

Cost reduction
Asset reduction
7-82

Elements of Turnaround

A turnaround situation represents absolute and relativeto-industry declining performance of a sufficient

magnitude to warrant explicit turnaround actions
The immediacy of the resulting threat to company
survival is known as situation severity
Turnaround responses among successful firms typically
include two stages of strategic activities: retrenchment
and the recovery response
The primary causes of the turnaround situation have
been associated with the second phase of the
turnaround process, the recovery response
7-83

Divestiture

A divestiture strategy involves the sale

of a firm or a major component of a firm
When retrenchment fails to accomplish
the desired turnaround, or when a
nonintegrated business activity achieves
an unusually high market value, strategic
managers often decide to sell the firm
Reasons for divestiture vary
7-84

Liquidation

When liquidation is the grand strategy,

the firm typically is sold in parts, only
occasionally as a wholebut for its
tangible asset value and not as a
going concern
Planned liquidation can be worthwhile

7-85

Bankruptcy

Liquidation bankruptcyagreeing to a
complete distribution of firm assets to
creditors, most of whom receive a small
fraction of the amount they are owed
Reorganization bankruptcythe managers
believe the firm can remain viable through
reorganization
Two notable types of bankruptcy

7-86

Joint Ventures

Occasionally two or more capable firms lack a

necessary component for success in a
particular competitive environment
The solution is a set of joint ventures, which
are commercial companies (children) created
and operated for the benefit of the co-owners
(parents)
The joint venture extends the supplierconsumer relationship and has strategic
advantages for both partners
7-87

Strategic Alliances

Strategic alliances are distinguished

from joint ventures because the
companies involved do not take an
equity position in one another
In some instances, strategic alliances
are synonymous with licensing
agreements
Outsourcing arrangements vary
7-88

Consortia, Keiretsus, and Chaebols

Consortia are defined as large interlocking

relationships between businesses of an
industry
In Japan such consortia are known as
keiretsus, in South Korea as chaebols
Their cooperative nature is growing in
evidence as is their market success

7-89

Selection of Long-Term Objectives and

Grand Strategy Sets

When strategic planners study their opportunities,

they try to determine which are most likely to result
in achieving various long-range objectives
Almost simultaneously, they try to forecast whether
an available grand strategy can take advantage of
preferred opportunities so the tentative objectives
can be met
In essence, then, three distinct but highly
interdependent choices are being made at one time

7-90

Sequence of Selection
and Strategy Objectives

The selection of long-range objectives and grand

strategies involves simultaneous, rather than
sequential, decisions
While it is true that objectives are needed to prevent
the firms direction and progress from being
determined by random forces, it is equally true that
objectives can be achieved only if strategies are
implemented

7-91

Thank You
Please forward your query
To: vstomar@amity.edu