business policy and strategic management quick notes

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Einstein College of Engineering1BA932- STRATEGIC MANAGEMENT Unit-1: Strategy and Process Conceptual framework for strategic management, the concept of strategy and the strategy formation process- Stakeholders in business- Vision Mission and purpose- Business definition, objectives and goals- corporate Governance and social responsibility- case study Unit-II: Competitive Advantage External Environment- porter?s five forces Model- strategic Groups competitive changes during Industry Evolution- Globalization and Industry Structure- National context and competitive advantage Resources- capabilities and competencies- core competencies- Low cost and differentiation, Generic Building Blocks of competitive Advantage- Distinctive Competencies- Resources and capabilities- durability of competitive Advantage- Avoiding failures and sustaining competitive advantage- case study Unit-III Strategies The generic strategic alternatives- stability, Expansion, Retrenchment and combination strategies- Business level strategy- Strategy in the Global Environment- Corporate strategy- Vertical Integration- Diversification and strategic Alliances- Building and Restructuring the corporation- Strategic analysis and choice- Environmental Threat and opportunity profile (ETOP)- Organizational Capability profile- Strategic Advantage profile- corporate portfolio Analysis- SWOT Analysis- Gap Analysis- Mc Kinsey?s 7s Framework- GE 9 cell Model- Distinctive Competitiveness- Selection of matrix- Balance Score Card- case study UNIT-IV Strategy Implementation & Evaluation The Implementation process, Resource allocation, Designing organizational Structure- Designing Strategic control systems- Matching structure and control to strategy – Implementing strategic change- politics- power and conflict- Techniques of strategic evaluation& control- case study UNIT-V Other Strategic Issues Managing Technology and Innovation- Strategic issues for Non profit organizations New Business Models and strategies for Internet Economy Text Books1. Thomas L. Wheelen, J.David Hunger and Krish Rangarajan, Strategic Management and Business policy, Pearson Education, 20062. Charless W.L. Hill & Gareth R.Jones, Strategic Management Theory, An Integrated Approach, Biztantra, Wiley India, 20073. Azhar Kazmi, Strategic Management & Business Policy, Tata McGraw HillEinstein College of Engineering2Lecture notes Unit-I Strategy and process Concept of strategy: The term strategy is derived from a Greek word strategos which means generalship. A plan or course of action or a set of decision rules making a pattern or creating a common thread. Definition for strategic management: Strategic Management is defined as the dynamic process of formulation, implementation, evaluation and control of strategies to realize the organizations strategic intent. Conceptual framework for the development of strategic management:? Strategic Advantage? Organizational capability? Competencies? Synergistic Effects? Strengths and weaknesses? Organizational Resources? organizational behaviorMeaning for Goal: Goal denotes what an organization hopes to accomplish in a future period of time . Meaning for Objectives: Objectives are the ends that state specifically how the goals shall be achieved. They are concrete and specific in contrast to goals that are generalized. Role of Objectives:? Objectives define the organizations relationship with its environment.? Objectives help an organization pursue its vision and mission.? Objectives provide the basis for strategic decision making.? Objectives provide the standards for performance Appraisal.Characteristics of Objectives:? Objectives should be understandable.? Objectives should be concrete and specific.? Objectives should be related to a time frame? Objectives should be measurable and controllable.1. Objectives should be challenging.Einstein College of Engineering3Meaning of vision: A vision statement is sometimes called a picture of your company in the future. Vision statement is your inspiration; it is the dream of what you want your company to accomplish. Meaning for mission: A mission statement is a brief description of a company?s fundamental purpose. The mission statement articulates the company?s purpose both for those in the organizations and for the public. Corporate Governance: Corporate Governance involves a set of relationships amongst the company?s management its board of directors, shareholders and other stakeholders. These relationships which various rules and incentives provide the structure through which the objectives of the company are set and the means of attaining the objectives and monitoring performance are determined. Definition for Business: A company should define its business in terms of three dimensions: 1. Who is being satisfied (what customer groups) 2. What is being satisfied (what customer needs) 3. How customer needs are being satisfied (by what skills, knowledge or distinctive competencies) Stake holders in Business: Stake holders are the individuals and groups who can affect by the strategic outcomes achieved and who have enforceable claims on a firm?s performance. Stake holders can support the effective strategic management of an organization. Stake holder's relationship management Stake holders can be divided into:1. Internal StakeholdersShareholders Employees Managers Directors2. External Stakeholders? Customers? Suppliers? Government? Banks/creditors? Trade unions? Mass MediaStake holder's Analysis:? Identify the stake holders.? Identify the stake holders expectations interests and concerns? Identify the claims stakeholders are likely to make on the organizationEinstein College of Engineering4? Identify the stakeholders who are most important from the organizations perspective.? Identify the strategic challenges involved in managing the stakeholder relationship.Key aspects of Good Corporate Governance? Transparency of corporate structures and operations? Corporate responsibility towards employees, creditors, suppliers and local communities where the corporation operates.Corporate Governance Mechanisms:? Ownership concentration? Board of Directors? Top management compensation? Threat of takeoverRelating corporate Governance to strategic management:? Corporate Governance and strategic intent? Corporate Governance and strategy formulation? Corporate Governance and strategy implementation? Corporate governance and strategy EvaluationSocial Responsibility of Business: Meaning: Social Responsibility of business refers to all such duties and obligations of business directed towards the welfare of society. The obligation of any business to protect and serve public interest is known as social responsibility of business. Why should business be socially responsible?? Public image? Government Regulation? Survival and growth? Employee satisfaction? Consumer AwarenessSocial Responsibility towards different Interest groups: 1. Responsibility towards owners: Owners are the persons who own the business. They contribute capital and bear the business.? Run the business efficiently? Proper utilization of capital and other resources.? Regular and fair return on capital invested.Responsibility towards Investors: Investors are those who provide finance by way of investment in shares, bonds, etc. Banks, financial institutions and investing public are all included in this category.Einstein College of Engineering5Ensuring safety of their investment Regular payment of interest. Responsibility towards employees: Business needs employees or workers to work for it. If the employees are satisfied and efficient, then the business can be successful.? Timely and regular payment of wages and salaries.? Opportunity for better career prospects.? Proper working conditions? Timely training and development? Better living conditions like housing, transport, canteen and crèches.Responsibility towards customers: No business can survive without the support of customers.? Products and services must be able to take care of the needs of the customers.? There must be regularity in supply of goods and services.? Price of the goods and services should be reasonable and affordable? There must be proper after sales-service? Grievances of the consumers if any must be settled quickly.Responsibility towards competitors: Competitors are the other businessmen or organization involved in a similar type of business.? Not to offer to customers heavy/discounts and or free products in every sale.? Not to defame competitors through false advertisements.Responsibility towards suppliers: Suppliers are businessmen who supply raw materials and other items required by manufacturers and traders.? Giving regular orders for purchase of goods? Availing reasonable credit period? Timely payment of dues.8. Responsibility towards Government: Business activities are governed by the rules and regulations framed by the government. Payment of fees, duties and taxes regularly as well as honestly Conforming to pollution control norms set up by government Not to indulge in restrictive trade practices. 9. Responsibility towards society: A society consists of individuals, groups, organizations, families etc. They all are the members of the society.? To help the weaker and backward sections of the society.? To generate employment.? To protect the environment? . To provide assistance in the field of research on education, medical science, technology etc.Steps in strategy formation process: Strategy formulation:Einstein College of Engineering6? Existing business model? Mission,Vision, Values and goals? External Analysis, opportunities and threats? Internal Analysis, Strengths and weaknesses? SWOT Strategic choice? Functional level strategies? Business level strategies? Global strategies? Corporate level strategiesStrategy Implementation? Governance and ethics? Designing Organization structure? Designing organization culture? Designing organization controls? FeedbackUnit-2 Competitive Advantage External Environment Concept of Environment: Environment literally means the surroundings, external objects, influences or circumstances under which someone or something exists. The environment of any organization is the aggregate of all conditions events and influences that surround and affect it. Characteristics of Environment:o Environment is Complex:o Environment is Dynamico Environment is Multi-facetedo Environment has a far- reaching impactMacro Environmental Factors:? Demographic Environment? Technological Environment? Socio-cultural Environment? Economic Environment? Political Environment? Regulatory Environment? International Environment? Supplier Environment? Task EnvironmentEinstein College of Engineering7Environmental Scanning: Environmental scanning plays a key role in strategy formulation by analyzing the strengths and weaknesses and opportunities and threats in the environment. Environmental scanning is defined as „monitoring, evaluating, and disseminating of information from external and internal environments to managers in organizations so that long term health of the organization will be ensured and strategic shocks can be avoided. Porter's five forces model:? Risk of entry by potential competitors? Bargaining power of suppliers? Bargaining power of buyers? Intensity of Rivalry among established firms? Threat of substitutesHis model focuses on five forces that shape competition within an Industry. Porter argues that the stronger each of these forces is the more limited is the ability of established companies to raise prices and earn greater profits. Within porter?s framework, a strong competitive force can be regarded as a threat because it depresses profits. A weak competitive force can be viewed as an opportunity because it allows a company to earn greater profits. The task facing managers is to recognize how changes in the five forces give rise to new opportunities and threats and to formulate appropriate strategic responses. Strategic groups within Industries Meaning: Companies in an industry often differ significantly from each other with respect to the way they strategically position their products in the market in terms of such factors as the distribution channels they use, the market segments they serve, the quality of their products, technological leadership, customer service, pricing policy, advertising policy, and promotions. As a result of these differences, within most industries it is possible to observe groups of companies in which each company follows a business model that is similar to that pursued by other companies in the group. These different groups of companies are known as strategic groups.? Proprietary group:The companies in this proprietary strategic group are pursuing a high risk high return strategy. It is a high risk strategy because basic drug research is difficult and expensive. The risks are high because the failure rate in new drug development is very high. Generic group: Low R&D spending, Production efficiency, as an emphasis on low prices characterizes the business models of companies in this strategic group. They are pursuing a low risk, low return strategy. It is low risk because they are investing millions of dollars in R&D. It is low return because they cannot charge high prices. Competitive changes during Industry Evolution Industry: An industry can be defined as a group pf companies offering products services that are close substitutes for each other that is product or services that satisfy the same basic customer needs. A company?s closest competitors its rivals are those that serve the same basic customer needs.Einstein College of Engineering8Industry and sector: An important distinction that needs to be made is between an industry and a sector. A sector is a group of closely related industries. Industry and market segments: Market segments are distinct groups of customers within a market that can be differentiated from each other on the basis of their distinct attributes and specific demands. Industry life cycle Analysis The task facing managers is to anticipate how the strength of competitive forces will change as the industry environment evolves and to formulate strategies that take advantage of opportunities arise and that counter emerging threats. Stages in Industry life cycle Analysis:? Embryonic Stage? Growth Stage? Industry shakeout? Maturity stage? Declining stageGlobalization and Industry Structure In conventional economic system, national markets are separate entities separated by trade barriers and barriers of distance, time and culture. With globalization, markets are moving towards a huge global market place. The tastes and preferences of customers of different countries are converging on common global norm. Products like coco-cola, Pepsi, Sony walkman and McDonald hamburgers are globally accepted. The intense rivalry forces all firms to maximize their efficiency, quality, innovative power and customer satisfaction. With hyper competition, the rate of innovation has increased significantly. Companies try to outperform their competitors by pioneering new products, processes and new ways of doing business. Previously protected national markets face the threat of new entrants and intense rivalry. After regulation of Indian economy the industrial sector has witnesses? enormous changes. The banking sector reforms also contributed to changes in the economic conditions of India. Merger, acquisition and joint venture with MNCs take place in large number. Ultimately intense competition is felt in the industrial scene. A vibrant stock market has emerged. National Context and Competitive advantage: In spite of globalization of markets and production successful companies in certain industries are found in specific countries? Japan has most successful consumer electronics companies in the world? Germany has many successful chemical and engineering companies in the world? United states has many of the world?s successful companies in computer and biotechnology? It shows that national context has an important bearing on the competitive position of the companies in the global marketEinstein College of Engineering9? Economists consider the cost and quality of factors of production as the major reason for the competitive advantage of some countries with respect to certain industries.Factors of production include basic factors such as labor, capital, raw material, land and advanced factors such as technological know-how, managerial talent and physical infrastructure The competitive advantages U.S enjoys in bio-technology due to technological know-how, low venture capital to fund risky start-ups in industries. According to Michael porter the nation?s competitive position in an industry depends on factor conditions, Industry rivalry, demand conditions, and related and supporting industries. The determinants of national competitive advantage:? Intensity of Rivalry? Factor conditions? Local Demand conditions? Competitiveness of related and supporting industriesStrategic Types: Miles and snow have classified the strategic types into:? Defenders:The defender strategic type companies have a limited product line and they focus on efficiency of existing operations.? Prospectors:These firms with broad product items focus on product innovation and market opportunities. They are pre-occupied with creativity at the expense of efficiency. Analyzers: Analyzers are firms which operate in both stable and variable markets. In stable markets the companies emphasize efficiency and in variable markets they emphasize innovation, creativity and differentiation.? Reactors:The firms, which do not have a consistent strategy to pursue, are called reactors. There is an absence of well-integrated strategy structure culture relationship. Their strategic moves are not integrated but piecemeal approach to environmental change makes them ineffective. Internal Analysis: Distinctive Competencies, Competitive advantage, and Profitability Internal Analysis is a three step process: Manager must understand process by which companies create value for customers and profit for themselves and they need to understand the role of resources, capabilities and distinctive competencies in this process They need to understand how important superior efficiency, innovation, quality and responsiveness to customers are in creating value and generating high profitability. They must be able to identify how the strengths of the enterprise boost its profitability and how any weaknesses lead to lower profitability.Einstein College of Engineering10Competencies, Resources and Competitive advantage Meaning of Competitive advantage: A company has a competitive advantage over its rivals when its profitability is greater than the average profitability of all companies in its industry. It has a sustained competitive advantage when it is able to maintain above average profitability over a number of years. Distinctive Competencies: Distinctive competencies are firm specific strengths that allow a company to differentiate its product and achieve substantially lower costs than its rivals and thus gain a competitive advantage. Resources: Resources are financial, physical, social or human, technological and organizational factors that allow a company to create value for its customers. Capabilities: Capabilities refer to a company?s skills at co-coordinating its resources and putting them to productive use. A critical distinction between Resources and capabilities: The distinction between resources and capabilities is critical to understanding what generates a distinctive competency. A company may have valuable resources, but unless it has the capability to use those resources effectively, it may not be able to create a distinctive competency. For Example: The steel mini-mill operator Nucor is widely acknowledged to be the most cost efficient steel maker in the United States. Its distinctive competency in low cost steel making does not come from any firm specific and valuable resources. Nucor has the same resources as many other mini-mill operators. What distinguishes Nucor is its unique capability to manage its resources in a highly productive way. Specifically Nucor?s structure, control systems and culture promote efficiency at all levels within the company. Strategy, Resources, Capabilities and competencies The relationship of a company?s strategies distinctive competencies and competitive advantage. Distinctive competencies shape the strategies that the company pursues which lead to competitive advantage and superior profitability. However, it is also very important to realize that the strategies a company adopts can build new resources and capabilities or strengthen the existing resources and capabilities thereby enhancing the distinctive competencies of the enterprise. Thus the relationship between distinctive competencies and strategies is not a linear one, rather it is a reciprocal one in which distinctive competencies shape strategies and strategies help to build and create distinctive competencies. Competitive advantage of a company becomes depends on three factors:? The value customers place on the company?s products? The price that a company charges for its products? The costs of creating those products.Einstein College of Engineering11The value customers place on a product reflects the utility they get from a product, the happiness or satisfaction gained from consuming or owning the product utility must be distinguished from price. Utility is something that customers get from a product. It is a function of the attributes of the product such as its performance, design, quality, and point of sale and after-sale service. Differentiation and cost structure Toyota has differentiated itself from General motors by its superior quality, which allows it to charge higher prices, and its superior productivity translates into a lower cost structure. Thus its competitive advantage over GM is the result of strategies that have led to distinctive competencies resulting in greater differentiation and a lower cost structure. Consider the automobile Industry, In 2003 Toyota made 2402 dollar in profit on every vehicle it manufactured in North America. GM in contrast, made only 178 dollar profit per vehicle. What accounts for the difference? First has the best reputation for quality in the industry. The higher quality translates into a higher utility and allows Toyota to charge 5 to 10 percent higher prices than GM. Second Toyota has a lower cost per vehicle than GM in part because of its superior labor productivity. Generic Building Blocks of Competitive advantage:? Superior Quality? Superior Efficiency? Superior Customer responsiveness? Superior Innovation? Competitive advantage? Low cost? Differentiation1. Superior Efficiency: A business is simply a device for transforming inputs into outputs. Inputs are basic factors of production such as labor, land, capital, management, and technological know-how. Outputs are the goods and services that the business produces. The simplest measure of efficiency is the quantity of inputs that it takes to produce a given output. That is efficiency outputs/Inputs. Two important components of efficiency:? Employee productivity? Capital productivity.2. Superior quality: A product can be thought of as a bundle of attributes. The attributes of many physical products include their form, features, performance, durability, reliability, style and design. 3. Superior Innovation:Innovation refers to the act of creating new products or processes. Product innovation is the development of products that are new to the world or haveEinstein College of Engineering12superior attributes to existing products. Process innovation is the development of a new process for producing products and delivering them to customers. Superior customer Responsiveness: To achieve superior responsiveness to customers a company must be able to do a better job than competitors of identifying and satisfying its customer needs. Customers will then attribute more utility to its products and creating a differentiation based on competitive advantage. Core competencies: Core competence is a fundamental enduring strength which is a key to competitive advantage. Core competence may be a competency in technology, process, engineering capability or expertise which is difficult for competitors to imitate. One core competence gives rise to several products. Honda?s core competence in designing and manufacturing engines had led to several products and business such as cars, motorcycles, lawnmowers, generators etc. The durability of competitive advantage? Barriers to Imitation? Capability of competitors? General dynamism of the Industry environment?Avoiding failures and sustaining competitive advantage When a company loses its competitive advantage, its profitability falls. The company does not necessarily fail; it may just have average or below average profitability and can remain in this mode for considerable time although its resource and capital base is shrinking. A failing company is one whose profitability is new substantially lower than the average profitability of its competitors, it has lost the ability to attract and generate resources so that its profit margins and invested capital are shrinking rapidly. Reasons for failure:? Inertia? Prior strategic commitments? The Icarus ParadoxSteps to Avoid failure:? Focus on the building blocks of competitive advantage? Institute continuous improvement and learning? Track Best Industrial Practice and Benchmarking? Overcome InertiaEvaluation of key resources :( VRIO) Barney has evolved VRIO framework of analysis to evaluate the firm?s key resources. The following questions are asked to assess the nature of resources.? Value- Does it provides competitive advantage?? Rareness- Do other competitors possess it?? Imitability- Is it costly for others to imitate?Einstein College of Engineering13? Organization- Does the firm exploit the resourcesUnit-3 Strategies Generic Strategic Alternatives Meaning of Corporate Strategy: Corporate strategy helps to exercise the choice of direction that an organization adopts. There could be a small business firm involved in a single business or a large, complex and diversified conglomerate with several different businesses. The corporate strategy in both these cases would be about the basic direction of the firm as a whole. According to Gluek, there are four strategic alternatives:? Expansion strategies? Stability strategies? Retrenchment Strategies? Combination strategies1. Expansion strategies: The corporate strategy of expansion is followed when an organization aims at high growth by substantially broadening the scope of one or more of its businesses in terms of their respective customer groups, customer functions and alternative technologies singly or jointly in order to improve its overall performance.2. Stability strategies:The corporate strategy of stability is adopted by an organization when it attempts an incremental improvement of its performance by marginally changing one or more of its businesses in terms of their respective customer groups, customer functions and alternative technologies respectively.3. Retrenchment strategies:The corporate strategy of retrenchment is followed when an organization aims at contraction of its activities through a substantial reduction or elimination of the scope of one or more of its businesses in terms of their respective customer groups, customer functions or alternative technologies either singly or jointly in order to improve its overall performance.4. Combination strategies:The combination strategy is followed when an organization adopts a mixture of stability, expansion and retrenchment strategies either at the same time in its different businesses or at different times in one of its businesses with the aim of improving its performance5. Growth strategy:Growth strategy is a corporate level strategy, designed to achieve increase in sales, assets and profits. Growth strategies may be classified as follows:? Vertical growth? Horizontal growthVertical growth occurs when one function previously carried over by a supplier or a distributor is being taken over by the company in order to reduce costs, to maintain quality of input and to gain control over scarce resources. Vertical growth results in vertical integration.Einstein College of Engineering141. Horizontal integration: A firm is said to follow horizontal integration if it acquires another firm that produces the same type of products the same type products with similar production process/marketing practices. 2. Vertical integration: Vertical integration means the degree to which a firm operates vertically in multiple locations on an industry?s value chain from extracting raw materials to manufacturing and retailing. Vertical integration occurs when a company produces its own inputs or disposes of its own outputs. 3. Backward Integration: Backward integration refers to performing a function previously provided by a supplier. 4. Forward integration: Forward integration means performing a function previously provided by a retailer. Diversification: Diversification is considered to be a complex one because it involves a simultaneous departure from current business, familiar products and familiar markets. Firms choose diversification when the growth objectives are very high and it could not be achieved within the existing product/market scope. Types of diversification:? Related diversification:In related diversification the firm enters into a new business activity, which is linked in a company?s existing business activity by commonality between one or more components of each activity?s value chain.? Unrelated diversification:In unrelated diversification, the firm enters into new business area that has no obvious connection with any of the existing business. It is suitable, if the company?s core functional skills are highly specialized and have few applications outside the company?s core business.? Concentric diversification:Concentric diversification is similar to related diversification as there are benefits of synergy when the new business is related to existing business through process, technology and marketing. Strategic Alliance Meaning: A strategic alliance is a formal relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations. Types of Strategic Alliances:? Joint Venture? Equity Strategic Alliance? Non-equity Strategic Alliance? Global Strategic AllianceStages of Alliance operation:? Strategy Development? Partner AssessmentEinstein College of Engineering15? Contract Negotiation? Alliance Operation? Alliance TerminationAdvantages of Strategic alliance:? Allowing each partner to concentrate on activities that best match their capabilities? Learning from partners developing competences that may be more widely exploited elsewhere.? Adequacy a suitability of the resources competencies of an organization for it to surviveDisadvantages of strategic Alliance:? Alliances are costly? Alliances can create indirect costs by blocking the possibility of cooperating with competing companies, thus possibly even denying the company various financing options.? Joint ventures also expose the company to its partners and the unique technologies that it has are sometimes revealed to its partner company.McKinsey's 7S Model This was created by the consulting company McKinsey and company in the early 1980s. Since then it has been widely used by practitioners and academics alike in analyzing hundreds of organizations. The Paper explains each of the seven components of the model and the links between them. It also includes practical guidance and advice for the students to analyze organizations using this model. At the end, some sources for further information on the model and case studies available. The McKinsey 7S model was named after a consulting company, McKinsey and company, which has conducted applied research in business and industry. All of the authors worked as consultants at McKinsey and company, in the 1980s, they used the model to analyze over 70 large organizations. The McKinsey 7S Framework was created as a recognizable and easily remembered model in business. The seven variables, which the authors terms “levers”, all begin with the letter “S”. Description of 7Ss: Strategy: Strategy is the plan of action an organization prepares in response to, or anticipation of changes in its external environment. Structure: Business needs to be organized in a specific form of shape that is generally referred to as organizational structure. Organizations are structured in a variety of ways, dependent on their objectives and culture. Systems: Every organization has some systems or internal processes to support and implement the strategy and run day-to-day affairs. For example, a company may follow a particular process for recruitment. Style/culture: All organizations have their own distinct culture and management style. It includes the dominant values, beliefs and norms which develop over time and become relatively enduring features of the organizational life. Staff: Organizations are made up of humans and it?s the people who make the real difference to the success of the organization in the increasingly knowledge-based society. The importance of human resources has thus got the central position in the strategy of the organization, away from the traditional model of capital and land.Einstein College of Engineering16Shared Values/super ordinate Goals: All members of the organization share some common fundamental ideas or guiding concepts around which the business is built. This may be to make money or to achieve excellence in a particular field. The seven components described above are normally categorized as soft and hard components:? Hard components? Soft componentsHard components are:? Strategy? Structure? SystemsSoft components are:? Shared values? Style? Staff? SkillsDistinctive Competitiveness Meaning: Distinctive Competence is a set of unique capabilities that certain firms possess allowing them to make inroads into desired markets and to gain advantage over the competition; generally, it is an activity that a firm performs better than its competition. To define a firm?s distinctive competence, management must complete an assessment of both internal and external corporate environments. When management finds an internal strength and both meets market needs and gives the firm a comparative advantage in the market place, that strength is the firm?s distinctive competence. Defining and Building Distinctive Competence: To define a company?s distinctive competence, managers often follow a particular process.1. They identify the strengths and weaknesses in the given marketplace.2. They analyze specific market needs and look for comparative advantages that they have over the competition.Balanced Scorecard: The balanced scorecard is a strategic performance management tool- a semi- standard structured report supported by proven design methods and automation tools that can be used by managers to keep track of the execution of activities by staff within their control and monitor the consequences arising from these actions. History:The first balanced scorecard was created by Art Schneider man (an independent consultant on the management of processes) in 1987 at Analog Devices, a mid-sized semi-conductor company. Art Schniederman participated in an unrelated research study in 1990 led by Dr.Robert S.Kaplan in conjunction with US management consultancy Nolan-Norton, and during this study described his work on balanced Scorecard. Subsequently, Kaplan and David P.Norton included anonymous details of this use of balanced Scorecard in their 1992 article on Balanced Scorecard. Kaplan & Norton?s article wasn?t the only paper on the topic published in early 1992. But the 1992 Kaplan&Einstein College of Engineering17Norton paper was a popular success, and was quickly followed by a second in 1993. In 1996, they published the book The Balanced Scorecard. These articles and the first book spread knowledge of the concept of Balanced Scorecard widely, but perhaps wrongly have led to Kaplan & Norton being seen as the creators of the Balanced Scorecard concept. Four Perspectives:1. Financial: Encourages the identification of a few relevant high-level financial measures.2. Customer: Encourages the identification of measures that answer the question “How do customers see us?”3. Internal Business Process: encourages the identification of measures that answer the question “What must we excel at?”4. Learning and Growth: encourages the identification of measures that answer the question “Can we continue to improve and create value?”Business level strategy This chapter examines how a company selects and pursues a business model that will allow it to complete effectively in an industry and grows its profits and profitability. A successful business model results from business level strategies that create a competitive advantage over rivals and achieve superior performance in an industry. In this chapter we examine that competitive decisions involved in creating a business model that will attract and retain customers and continue to do so over time so that a company enjoys growing profits and profitability. To create a successful business model, strategic managers must:1. Formulate business- level strategies that will allow a company to attract customers away from other companies in the industry.2. Implement those business level strategies which also involve the use of functional level strategies to increase responsiveness to customers, efficiency, innovation and quality.Competitive positioning and the Business model:1. To create a successful business model, managers must choose a set of business-level strategies that work together to give a company competitive advantage over its rivals2. To craft a successful model a company must first define its business, which entails decisions abouta. Customer needs or what is to be satisfiedb. Customer groups or what is to be satisfiedc. Distinctive competencies or how customer needs are to be satisfied.The decision managers make about these three issues determine which set of strategies they formulate and implement to put a company?s business model into action and create value for customers. Formulating the Business model: Customer needs and product Differentiation 1. Customer needs: are desires, wants that can be satisfies by means of the attributes or characteristics of a product a good or service. For Example: A person?s craving for something sweet can be satisfied by chocolates, ice-cream, spoonful of sugar. Factors determine which products a customer chooses to satisfy these needs:Einstein College of Engineering18? The way a product is differentiated from other products of its type so that it appeals to customers? The price of the product? All companies must differentiate their products to a certain degree to attract customer? Some companies however decide to offer customers a low prices products and do not engage in much product differentiationCompanies that seek to create something unique about their product differentiation, their products to a much greater degree that others so that they satisfy customers needs in ways other products cannot. Product differentiation: It is the process of designing products to satisfy customer?s needs. A company obtains a competitive advantage when it creates makes and sells a product in a way that better satisfies customer needs than its rivals do. If managers devise strategies to differentiate a product by innovation, excellent quality, or responsiveness to customers they are creating a business model based on offering customers differentiated products. Formulating the Business model3. Customer groups: The second main choice involved in formulating a successful business model is to decide which kind of products to offer to which customer groups. Customer groups are the sets of people who share a similar need for a particular product. Because a particular product usually satisfies several different kinds of desires and needs, many different customer groups normally exist in a market. In the car market, for example some customers want basic transportation and others want the thrill of driving a sports car. Some want for luxury purpose.4. Identifying customer groups and market segments: In the athletic shoe market the two main customer groups are those people who use them for sporting purposes those who like to wear them because they are casual and comfort. Within each customer group there are often subgroups composed of people who have an even more specific need for a product. Inside the group of people who buy athletic shoes for sporting purposes, for example are subgroups of people who buy shoes suited to a specific kind of activity, such as running, aerobics, walking and tennis.A company searching for a successful business model has to group customers according to the similarities or differences in their needs to discover what kinds of products to develop for different kinds of customers. Once a group of customers who share similar or specific need for a product has been identified, this group is treated as a market segment. Three Approaches to Market Segmentation:? No Market segmentation: First a company might choose not to recognize that different market segments exist and make a product targeted at the average or typical customer. In this case customer responsiveness is at a minimum and the focus is on price, not differentiation.? High Market segmentation: Second a company can choose to recognize the differences between customer groups and make a product targeted toward most or all of the different market segments. In this case customer responsiveness is high and products are being customized to meet the specific needs of customers in each group, so the emphasis is on differentiation not price.? Focused Market segmentation: Third a company might choose to target just one or two market segments and decide its resources to developing products for customers inEinstein College of Engineering19just these segments. In this case, it may be highly responsive to the needs of customers in only these segments, or it may offer a bare-bones product to undercut the prices charged by companies who do focus on differentiation.Generic Business- level strategies:? Cost leadership: A company?s business model in pursuing a cost-leadership strategy is based on doing everything it can to lower its cost structure so it can make and sell goods or services at a lower cost than its competitors. In essence a company seeks to achieve competitive advantage and above average profitability by developing a cost leadership business model that positions it on the value creation frontier as close as possible to the lower costs/lower prices axis.Focused Cost leadership: A cost leader is not always a large national company that targets the average customer. Sometimes a company can target one or a few market segments and successfully pursue cost leadership by developing the right strategies to serve those segments.? Differentiation: A differentiation business model is based on pursuing a set of generic strategies that allows a company to achieve a competitive advantage by creating a product that customers perceive as different or distinct in some important way.Focused Differentiation: A in the case of the focused cost leader, a company that pursues a business model based on focused differentiation chooses to specialize in serving the needs of one or two market segments of niches. One it has chosen its market segment. A focused company position itself using differentiation Gap Analysis Meaning: In gap Analysis, the strategist examines what the organization wants to achieve (desired performance) and what it has really achieved (actual performance). The gap between what is desired and what is achieved widens as the time passes no strategy adopted. Corporate portfolio Analysis Meaning: Corporate portfolio analysis could be defined as a set of techniques that help strategists in taking strategic decisions with regard to individual products or business in a firm?s portfolio. It is primarily used for competitive analysis and strategic planning in multi-product and multi-business firms. They may also be used in less diversified firms, if these consist of a main business and other minor complementary interests. The main advantages in adopting a portfolio approach in a multi-product multi-business firm is that resources could be targeted at the corporate level to those businesses that possess the greatest potential for creating competitive advantage.Einstein College of Engineering20Environment Threat and Opportunity Profile (ETOP) Meaning of Environmental Scanning: Environmental scanning can be defined as the process by which organizations monitor their relevant environment to identify opportunities and threats affecting their business for the purpose of taking strategic decisions. Appraising the Environment: In order to draw a clear picture of what opportunities and threats are faced by the organization at a given time. It is necessary to appraise the environment. This is done by being aware of the factors that affect environmental appraisal identifying the environmental factors and structuring the results of this environmental appraisal. Structuring Environmental Appraisal: The identification of environmental issues is helpful in structuring the environmental appraisal so that the strategists have a good idea of where the environmental opportunities and threats lie. There are many techniques to structure the environmental appraisal. One such technique suggested by Gluek is that preparing an ETOP for an organization. The preparation of an ETOP involves dividing the environment into different sectors and then analyzing the impact of each sector on the organization. Environment threat and opportunity profile (ETOP) for a bicycle companyS.NoEnvironmental sectorNature of ImpactImpact of each sector1EconomicUp ArrowGrowing affluence among urban consumers rising disposable incomes and living standards2MarketHorizontal ArrowOrganized sector a virtual oligopoly with four major manufacturers, buyers critical and better informed overall industry growth rate not encouraging unsaturated demandEinstein College of Engineering21traditional distribution systems3InternationalDown ArrowGlobal Imports growing but India?s share shrinking Major importers are the US and EU but India exports mainly to Africa.? Up Arrow indicates Favorable Impact? Down Arrow indicates unfavorable Impact? Horizontal Arrow indicates Neutral ImpactThe preparation of an ETOP provides a clear picture to the strategists about which sectors and the different factors in each sector have a favorable impact on the organization. By the means of an ETOP, the organization knows where it stands with respect to its environment. Obviously, such an understanding can be of a great help to an organization in formulating appropriate strategies to take advantage of the opportunities and counter the threats in its environment. Meaning of organizational Appraisal: The purpose of organizational appraisal is to determine the organizational capability in terms of strengths and weaknesses that lie in different functional areas. This is necessary since the strengths and weaknesses have to be matched with the environmental opportunities and threats for strategy formulation to take place. Strategic Advantage Profile (SAP): A SAP can also be prepared directly when students analyses cases during classroom learning, without making a detailed OCP. An SAP provides a picture of the more critical areas which can have a relationship with the strategic picture of the firm in the future. Strategic Advantage Profile for a bicycle companyS.NoCapability FactorNature of ImpactCompetitive strengths or weaknesses1.FinanceDown ArrowHigh cost of capital, reserves and surplus position unsatisfactory2MarketingHorizontal ArrowFierce competition in industry?s company?Einstein College of Engineering223InformationUp ArrowAdvanced Management information system in place, most traditional functions such as payroll and accounting computerized, company website has limited scope for E-Commerce? Up Arrow indicates Strength? Down Arrow indicates Weaknesses? Horizontal Arrow indicates NeutralOrganizational Capability Profile (OCP) Meaning: The organizational capability profile is drawn in the form of a chart. The strategists are required to systematically assess the various functional areas and subjectively assign values to the different functional capability factors and sub factors along a scale ranging from values of -5 to +5 Summarized form of OCP Capability Factors Weakness Normal Strength Financial Capability -5 0 +5 Factors? Sources of fundsUsage of funds Management of funds SWOT Analysis Meaning: Every organization is a part of an industry. Almost all organizations face competition either directly or indirectly. Thus the industry and competition are vital considerations in making a strategic choice. It is quite obvious that any strategic choice made by an organization cannot be made unless the industry and competition have been analyzed. The environmental as well organizational appraisal dealt with the opportunities, threats, strengths and weaknesses relevant for an organization. Consolidated SWOT profile for a bicycle companyETOPSector ImpactSAPImpact factorEconomicUp ArrowFinanceDown ArrowEinstein College of Engineering23MarketHorizontal ArrowMarketingHorizontal ArrowInternationalDown ArrowOperationsUp ArrowPoliticalHorizontal ArrowPersonnelHorizontal ArrowRegulatoryHorizontal ArrowInformation managementUp ArrowSocialUp ArrowGeneral ManagementUp ArrowBuilding and Re-structuring the corporation There are various methods for the firms to enter into a new business and restructure the existing one. Firms use following methods for building:? Start-up route: In this route, the business is started from the scratch by building facilities, purchasing equipments, recruiting employees, opening up distribution outlet and so on.? Acquisition: Acquisition involves purchasing an established company, complete with all facilities, equipment and personnel.? Joint Venture: Joint venture involves starting a new venture with the help of a partner.? Merger: Merger involves fusion of two or more companies into one company.? Takeover: A company which is in financial distress can undergo the process of takeover. A takeover can be voluntary when the company requests another company to takeover the assets and liabilities and save it from becoming bankrupt.Re-structuring: Re-structuring involves strategies for reducing the scope of the firm by exiting from unprofitable business. Restructuring is a popular strategy during post liberalization era where diversified organizations divested to concentrate on core business. Re-structuring strategies:? Retrenchment: Retrenchment strategies are adopted when the firm?s performance is poor and its competitive position is weak.? Divestment Strategy: Divestment strategy requires dropping of some of the businesses or part of the business of the firm, which arises from conscious corporate judgement in order to reverse a negative trend.? Spin-off: Selling of a business unit to independent investors is known as spin-off. It is the best way to recover the initial investment as much as possible. The highest bidder gets the divested unit.? Management-buyout: selling off the divested unit to its management is known as management buyout.? Harvest strategy: A harvest strategy involves halting investment in a unit in order to maximize short- to- medium term cash flow from that unit before liquidating it.? Liquidation: Liquidation is considered to be an unattractive strategy because the industry is unattractive and the firm is in a weak competitive position. It is pursued as aEinstein College of Engineering24last step because the employees lose jobs and it is considered to be a sign of failure of the top management.Strategy in Global Environment Introduction: In international business operations business enterprises pursue global expansion to support generic business level strategies such as cost leadership and differentiation. Companies expand their operations globally in order to increase their profitability. They perform the following activities towards this end.? Transferring their distinctive competencies? Dispersing various value creation activities to favorable locations? Exploiting experience curve effects.Global Strategies:? International Strategy? Multi-domestic strategy? Global Strategy? Transnational Strategy? Entry Mode:Global companies have five options to enter into a foreign market? Exporting? Licensing? Franchising? Subsidiary? Joint venture? Wholly owned subsidiariesGlobal Strategic Alliance: A strategic alliance is a cooperative agreement between companies who are competitors from different companies. It may take the form of formal joint venture or short-term contractual agreement with equity participation or issue-based participation.? To gain access to foreign market? To reduce financial risk? To bring complementary skills? To reduce political risks? To achieve competitive advantage? To set technological standardsGE Nine-cell MatrixThis corporate portfolio analysis technique is based on the pioneering efforts of the General Electric Company of the United States, supported by the consulting firm of McKinsey& company. The vertical axis represents industry attractiveness, which is a weighted compositeEinstein College of Engineering25rating based on eight different factors. These factors are: market size and growth rate, Industry profit margin, competitive intensity, seasonality, cyclicality, economies of scale, technology and social, environmental, legal and human impacts. The horizontal axis represents business strength competitive position, which is again a weighted composite rating based on seven factors. These factors are: relative market share, profit margins, ability to compete on price and quality, knowledge of customer and market, competitive strengths and weaknesses, technological capability and calibre of management. Strategic Analysis and choice Meaning of strategic choice: Choice of a strategy involves an understanding of choice mechanism and issues involved in it. Definition: Gleuek has defined strategic choice as the process of selecting the best strategy out of all available strategies. Steps in strategic choice: Focusing on strategic alternatives Evaluating strategic alternatives Considering Decision factors Choice of strategy Objective factors are grouped into two categories: Environmental factors: It includes volatility of environment, input supply from environment and powerful stakeholders. Organizational factors: It includes organization?s mission, the strategic intent, its business definition and its strengths and weaknesses. Subjective factors: Various subjective factors may be classified as:? Organization?s past strategies? Personal factors? Attitude to risks? Internal political consideration? Pressure from stakeholdersProcess of Strategic choice: Strategic choice involves evaluation of the pros and cons of each strategic alternative and selection of the best alternative. Three techniques are used in the process of selection of a strategy.? Devil?s Advocate? Dialectical Enquiry? Strategic shadow Committee1. Devil?s Advocate in strategic decision making is responsible for identifying potential pitfalls and problems in a proposed strategic alternative by making a formal presentation.2. Dialectical inquiry involves making two proposals with contrasting assumptions for each strategic alternative. The merits and demerits of the proposal will be argued by advocates before the key decision makers. Finally one alternative will emerge viable for implementation.3. A strategic shadow committee consists of members drawn below executive level. They serve the committee for two years. They inspect all materials and attend all meetings ofEinstein College of Engineering26executive strategy. The members generate views regarding constraints faced by management. Their report is submitted to Board of Directors.Unit-4 Strategy Implementation and Evaluation Introduction: Organizational structure and culture can have a direct bearing on a company?s profits. This chapter examines how managers can best implement their strategies through their organization?s structure and culture to achieve a competitive advantage and superior performance. Implementing strategy through organizational design: Strategy implementation involves the use of organizational design, the process of deciding how a company should create, use and combine organizational structure control systems and culture to pursue a business model successfully. Strategy Implementation through Organizational design: The implementation of strategy involves three steps:? Organizational structure? Organizational culture? control systemsBasics of designing organization structure: The following basic aspects which require a strategist?s attention while designing structure? Differentiation? Integration? Bureaucratic cost? Allocating Authority and ResponsibilitySpan of control: Span of control means the number of subordinate?s manager controls effectively. The term span of control refers to the number of subordinates who report directly to a manager.? Grouping Tasks, functions and Divisions? Tall and Flat organizations? Centralization? DecentralizationIntegration and Integrating Mechanisms: Much coordination takes place among people, functions and divisions through the hierarchy of authority, often however as a structure becomes complex, this is not enough and top managers need to use various integrating mechanisms to increase communication and coordination among functions and divisions. Greater the complexity of an organizations structure the greater is the need for coordination among people, functions and divisions to make the organizational structure work efficiently. Three kinds of integrating mechanisms:? Direct contact? Liaison Role? TeamsEinstein College of Engineering27Designing Strategic Control Systems: Introduction: Strategic control systems provide managers with required information to find out whether strategy and structure move in the same direction. It includes target setting, monitoring, evaluation and feedback system. Steps in Strategic Control process: Establish standards and Targets Create Measuring and monitoring systems Compare Actual with targets Evaluate and take corrective actions Levels of control: Corporate level managers Divisional level managers Functional level managers First level managers Types of control system:? Personal control? Output control? Behavior controlOrganizational power and Politics: Organizational power: The organizational power is the ability to influence people or things usually obtained through the control of important resources. Organizational Politics: The organizational politics may be viewed as the tactics by which self interested individuals and groups try to power to influence the goals and objectives of the organization to further their own interest. Sources of power? Ability to cope with uncertainty? Centrality? Control over information? Non-substitutability? Control over contingencies? Control over resourcesOrganizational Conflict: Conflict may be defined as a situation when the goal directed behavior of one group blocks the goal directed behavior of another. Organizational conflict process:? Latent conflict? Perceived conflict? Felt conflict? Manifest conflict? conflict aftermathEinstein College of Engineering28Conflict Resolution strategies:? Changing task Relationship? Changing controls? Implementing strategic change? Changing Leadership? Changing the strategyManaging the organization: The basic principles for organization change are as follows:? Unfreezing? Movement? RefreezingTechniques of Strategic Evaluation and control: Strategic Control: Strategy formulation is based on assumptions about environmental and organizational factors which are nebulous and dynamic in nature. The time gap between strategy formulation and implementation is the major reason for these assumptions turned out to be invalid. Types of strategic controls:? Premise control? Implementation control? Strategic Surveillance? Special Alert controlTechniques of Strategic Evaluation and control: There are two methods in strategic evaluation and control:? Strategic momentum control? Strategic leap control? Strategic Issue Management? Strategic field Analysis? Systems Modeling? ScenariosUNIT-5 Other Strategic Issues Strategic Issues in Managing Technology and Innovation The strategic issues in managing technology and innovation and their influence on environmental scanning, Strategy formulation, Strategy implementation, Strategy evaluation and control are worth studying from the perspective of strategists in modern organization.Einstein College of Engineering29Research studies have pointed out that innovative companies such as 3M, Procter Gamble and Rubbermaid are slow in introducing new products and their rate of success is not encouraging Role of Management: The top management should emphasize the importance of technology and innovation and they should provide proper direction.? Environmental Scanning:? External Scanning? Impact of stakeholders on innovation? Lead users? Market Research? New product Experimentation? Internal scanning? Resource allocation issuesTime to Market Issues: The new product development period is again a crucial issue. Within four years many new products are imitated. Shorter the period, more beneficial for the company. Japanese auto manufacturers have gained competitive advantage over their rivals due to relatively short product development cycle. Strategy Formulation: The following crucial questions are raised in strategy formulation? Is the firm a leader or follower in respect of R&D strategy?? Should we develop our own technology?? Or should we go for technology outsourcing?? What should be the mix of basic and applied research?Technology sourcing: There are two methods for acquiring technology. It involves make or buy decision. In-house R&D capability is one method and tapping the R&D capabilities of competitors, suppliers and other organizations through contracts is another choice available for companies. Strategic R&D alliance involves? Joint programmes to develop new technology? Joint ventures establishing a separate company to take a new product to market.? Minority investments in innovative firms.It will be appropriate for companies to buy technology which is commonly available from others but make technology themselves which is rare, to remain competitive. Outsourcing of technology will be suitable under the following conditions.? The technology is of low significance to competitive advantage? The supplier has proprietary technology? The supplier?s technology is easy to adopt with the present system? The technology development needs expertise? The technology development needs new resources and new peopleTechnology competence: In the case of technology outsourcing, the companies should have a minimal R&D capability in order to judge the value of technology developed by others.Einstein College of Engineering30Strategy Implementation: To develop innovative organizations deployment of sufficient resources and development of appropriate culture are crucial at all stages of new product development. Innovative Culture: Entrepreneurial culture is a part of innovative culture which presupposes flexibility and dynamism into the structure. “Diffusion of Innovation” observes that an innovative organization has the following characteristics.? Positive Attitude to change? Decentralized Decision Making? Informal structure? Inter connectedness? Complexity? Slack resources? System opennessThe employees who are involved in innovative process usually fulfill three different roles such as:? Product
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