analyzing the business environment

7/29/2019 Analyzing the Business Environment

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Analyzing the BusinessEnvironment

(The Strategic Position**)Prof Ashish K Mitra


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Analyzing Environment

Awareness of the environment is not a specialproject to be undertaken only when warning ofchange becomes deafening

Kenneth R Andrews

Analysis is the critical starting point of strategicthinking

Kenichi Ohmae

It is not the strongest of the species that

survive, nor the most intelligent, but the onemost responsive to change

Charles Darwin


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Company Mission

External EnvironmentOperatingIndustryRemote

Company Profile(Resources & capa-bilities)

Strategic Analysis and Choice

Long-term Objectives Generic & Grand Strategies

Annual Plans &Short term Objectives

Functional / Operating

Strategies/ tactics

Policies that empower

action

Institutionalization of Strategy

Strategic Control & continuous improvement

? Pos

sible

? Desired

Competitor -> buyer and to consider

explicitly possibilities of substitution and newentrants. Value net draws complementary relationships

into the picture and accounts for thecomplication that complimentor can also

become a competitor Ghemawat says even more types of players

needed to be added, depending on the context


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Re-cap of analyzing business environment

Porters Five forces model of competitionfor Industry analysis

Strategic Groups within Industries

Industry life cycle analysis Embryonic stage

Growth stage

Shakeout stage Mature stage

Declining stage

Strategic Groups Within Industries


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Strategic Groups Within Industries

The concept of strategic groups

Within an industry, a competitorgrouping using similarstrategic characteristics, that differ from other groupswithin the same industry or sector.

There may be different characteristics whichdistinguish between strategic groups. E.g; Size,geographic coverage, breadth of product range, qualityor service level, R &D spending etc

Companies in same strategic group follow largelysimilar strategies or compete on similar bases in the

markets


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Impl icat ions of strategic gro ups

The closest industry competitors are those in thesame strategic group.

The various industry groups are differentially and

competitively advantaged and positioned.

Mobility barriersinhibit the movement of competitorsfrom one strategic group to another. Mobility barriersbetween different strategic groups vary from industry

to industry. Could be related to capabilities ,resources of the companies in different strategicgroups.

Strategic Groups in the Pharmaceutical


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Strategic Groups in the PharmaceuticalIndustry


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The concept of Organizational Fields is a way ofunderstanding this widernetworkofinfluences andre lat ionshipsin business environment.

Participants of organizational field interact morefrequently with one another than with those outside thefield. These relationships often constraint, guide or even

dictate economic decisions and priorities such asresource deployment.

Organizational field of justice has lawyers, police,courts, prisons, and probation services. Although theirroles are different they are all committed to deliver good

justice. In case of say telecom company other than valuechain partners, it will be regulators, professionalassociations etc.


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Various members of an organizational field

are tied together in the ways beyondeconomic dependency. They share acommon set of purposes ( at least at thegeneric level) and more crucially they arelikely to share a set of taken-for-grantedbeliefs and assumptions. This may bedeeply embedded and hard to surface and

concern the legitimacy of an organizationwithin an organizational field.

Th I d t Lif C l M d l


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The Industry Life Cycle Model

Stages in the industry lifecycle:


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The five forces, strategic groups, and l i fe cyclemodelsprovide useful ways of thinking about and

analyzing the nature of competition within an industry toidentify opportunities and threats. Howevereach has itslimitations & managers need to be aware of the same.

In many industries competition can be viewed as a

process driven by innovation. Innovation often causeschanges in the industry life cycle. (several shakeouts inTelecom industry).

Innovations frequently lower the fixed costs of

Production, thereby reducing barriers to entry. A fiveforces model applied to steel industry in US in 1970would look very different from that applied today.

Porter in his recent work saysinnovations unfreeze &


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yre-shape industry structure.

He argues that after a period of turbulence triggered byinnovation, the structure of an industry once more settles

down to a fairly stable pattern , and the five forces andstrategic group concepts can once more be applied. Because the five forces and strategic group models

present a static picture of competition, they can notadequately capture what occurs during period of rapid

changes in the industry environment when value ismigrating. Many industries are tending to become hypercompetitive,

meaning that they are characterized by permanent andongoing innovation. The structure of such industries areconstantly being revolutionized with few periods ofequilibrium.Competitive advantages are quickly eroded

A company wou ld not be prof i table just because i t isbased in an attract ive indus try or strategic group.


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FIGURE 3.4

Punctuated

Equilibrium

andCompetiti

ve

Structure


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Entrepreneurship & innovation are fundamentalfeatures of competition and driving force behindindustry evolution. Innovation represents aperennial gale of creative destruction through

which favorable industry structures monopolyin particular contain the seeds of their owndestruction.

Hyper competition

Competition in the new industry ( digitaltechnology)


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What are the key forces at work in the competitiveenvironment? These will differ by type of industry.

What are the underlying forces in the micro-environmentthat are driving competitive forces? Eg;lower cost & high availability of software skills in India isan opportunity & a threat to Us & Eurpean companies

Is it likely to change, if so, how? For eg; governmentaction in reducing health care costs & promotion of

generics would increase pressure on branded drugs inUS.

How do competitors standin relation to competitiveforces? Their weaknesses & strengths.

What can managers do to influence the competitiveforces affecting an SBU? Can they build entrybarriers,power over suppliers or diminish rivalry?


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Competitive advantage erodes over time due toforces discussed above and / or competitors willovercome adverse forces.

Theprocess of erosion of is getting speeded upby changes in macro-environment such as newtechnologies, globalization or deregulation.

Though time scale differs, Competitiveadvantages is mostly becoming temporary.

Organizations respond to erosion of theircompetitive position by creating cycles of

competition various moves & counter moveson the basis of cost / quality thus shifting thebasis of competition.


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Organizations are increasingly operating insituation where the speed of the cycles of

competition is very fast this has been calledhyper competition.

Hyper competition occurs where the frequency,boldness and aggressiveness of dynamic

movements by competitors accelerate to createa condition of constant disequilibrium andchange.

Whereas competition in slower-movingenvironments is primarily concerned with

building and sustaining competitive advantagesthat are difficult to imitate, hypercompetitiveenvironments advantages will be temporary.


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Competi t ion is about disrup t ing the

status quoso that no one is able tosustain long -term advantage on any

given basis.

So long term advantage is gained througha sequence of short lived moves.

M k S A k i f


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Market Segments : A market segment is a group ofcustomers who have similar needs that are different fromcustomer needs in other parts of the market.

Theoretically different factors could be used to identifymarket segments.. Demography age, sex, race,income, family size, life cycle stage, Lifestyle, Size ofpurchase, purpose of use, purchasing behaviour.

Industrial markets classification could be based onclassification of buyers like domestic industry vs foreignbuyers.

Identifying strategic customer: Strategic customer is the

person(s) who have the most influence over the goods orservices that are purchased. Hence strategy mustaddress them. In many markets the strategic customeracts as a gatekeeper to the end user.


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Manufacturers have two customers the shops and theshops customers. So there has to be an understanding

of what is valued by that strategic customer as a startingpoint of the strategy. However the requirement of theother customer has also to be met.

In many consumer goods, the retail outlet is the strategiccustomer as the way it displays, promotes & supportsproducts in store is hugely influential on the finalconsumer preferences.

But internet shopping may change this pattern, puttingthe final consumer back as the strategic customer.

Understanding what customer Values..


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Understanding customer needs and how they differbetween segments is crucial to developing appropriatestrategic capability in an organization.

However, value is mult i -d imensional & i t should beseen through the eyes of the cus tomers. Value ofproduct or services is often wrongly conceived ofinternally ( eg; designers, engineers, teachers orlawyers) and not tested out with customers or clients.

Threshold requirements( product features) are expectedfrom any provider in a given market segment

Critical Success Factors (CSFs) are those productfeatures that are particularly valued by a group of

customers and, therefore, where the organization mustexcel to outperform competition. Understanding of theCSFs of a group of customers ( market segment is veryimportant.

Strategic Gaps


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g p The framework of PESTEL ( macro environment factors),

Five Forces (Industry environment factors) and others

like strategic groups, custom er valuehelp managersidentify and / or create new market space to gaincompetitive advantages.

Kim & Mauborgne in Blue Ocean Strategy have arguedthat if organizations concentrate on competing head to

head, the environment will get very tough. They haveencouraged managers to seek opportunities in businessenvironment which they call strategic gaps.

A s trategic Gapis an opportunity in the competitiveenvironment that is not being fully exploited bycompetitors. There may be different opportunities to dothis:


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Looking across substitute industries : direct rivals tend totrigger a stronger response than potential substitutes.

Software companies bringing electronic books & atlasesas substitute to paper versions.

Looking across strategic groups: particularly if changesin micro environment make new market spaceseconomically viable.

Looking across chain of buyers: adjusting marketingstrategy to most profitable buyer or influencer.

Looking across complementary products & serviceoffering: like providing wholesome book buying

experience instead of just stocking the right books. Looking for new market segment: like no frills segment

Looking across / ahead in time

Strategies to Alter Industry Structure


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g y

Opportunity to change industry structure in

order to alleviate competitive pressure ?


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In North America & Europe Petroleum refiningearning below cost of capital

Reason - many competitors, excess capacity &commodity products

Consolidation to increase concentration, capacityrationalization; BP acquired Amoco, then Arco; Exxonmerged with Mobil; In Europe Total, Fina & Elf merged.

US Airlines - mergers & alliances to reduce competition.

In Chemical industry BASF, Dow, ICI & Bayer-

capacity swapping & rationalization Mittal & Arcelor merger consolidation of fragmented

global steel industry

The Rise of strategy consultants


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The Rise of strategy consultants BCG, founded in 1963, had a major impact by applying

quantitative research to problems of business and

corporate strategy. Its founder, Bruce Hendersonbelieved that goodstrategy must be based primarily onlogic, not.. On experience derived from intuition.

Economic theory will eventually lead to thedevelopment of a set of universal rules for strategy,

rather than strategy being largely intuitive and basedupon traditional patterns of behavior which have beensuccessful in past. ( business of selling - powerful oversimplifications)

BCG came out with the concept ofexperience curve

in 1965-66 to explain pr ice and com pet it ive behaviorin extremely fast grow ing segments of indus tr ies forits clients like Texas Instruments, Black and Decker.

Exper ience cu rve


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Exper ience cu rve

BCG , based on close study of fast growing industriespropounded that as the total accumulated experience of afirm in the industry increases, it incurs less cost ofproducing a product.

BCG claimed that for each cumulat ive doubl ing ofexperience ( accumulated production over time ) , totalcosts would decl ine rough ly by 20%-30% because of

economies of scale, organizational learning andtechnolog ical innovat ion.

According to BCGs explanation of its strategicimplications, the producer who has made the mostunits should have the lowest costs and the highest

profits. Bruce Henderson claimed that with experiencecurve, thestability of competitive relationships should bepredictable, the value of market share change should becalculable, the effects of growth rate should also becalculable

E i


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Eperience curve

Volume effect is not only the one to helpreduce cost & increase efficiency , thelearning from experience plays a vital role

in achieving this. Over time, companies can identifyinefficient, ineffective procedures. They re-engineer processes, improve material and

resource management, strengthensupplier relationships etc.

The Experience Curve


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The Experience Curve

Strategic Analysis


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g y Strategic Analysis is done at

Corporate level

Business level

In a multi-business corporation at Corporatelevelthe major strategic decisions are about

What Businesses should the we be in?

How should we allocate resources between them?

Other important decisions relate to How do we organize the corporation ? How much decision

making should we allow at the level of individual business unit?

What activities would benefit from being organized centrally?

How do we exploit the potential links between different but

related, business units?

How do we develop and reward business unit managers?

Two Levels of Strategy


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Two Levels of Strategy

A diversified company has two levels of strategy

2. Business-Level Strategy(Competitive Strategy)How to create competitive advantage in each

business in which the company competes

1. Corporate-Level Strategy(Company-wide Strategy)How to create value for the corporation as a whole

Key Questions in


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Key Questions inCorporate Strategy

1. What businesses should the corporation be in?

2. How should the corporate office manage thearray of business units?

Corporate Strategyiswhat makes the

corporate whole add upto more than the sum ofits business unit parts

Portfolio anal sis


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Portfolio analysis

Corporate level : tools like BCG Growth-Share Matrix,and GE Nine-Cell planning Grid are used to examineeach business as a separate entity and as a contributortothe organizations total business portfolio. The above analysis provides a neutral basis for

resource allocation at the corporate level, encourages framing of good strategies at the businessunit level and

leads to better implementation of strategy because ofintensified focus and objectives all across the

corporation. Business units are classified into invest , ho ld ,divestandharvestcategories based on theanalysis

BCG Growth- Share Matrix


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By early 1970s, the experience curve had led to BCGsGrowth-Marketshare matr ix concept, which

represented the first use of portfolio analysis. Thisapproach is widely used in Corporate strategic analysisfor managing a portfolio of different business units ( ormajor product lines). It helps in analyzing likelygenerators and optimum users of corporateresources.

The matrix takes into consideration, the growth rate ofthe market and relative market share of the business unit

In fast growing industries / market provide opportunity forhigh profits and rapid growth of turnover.

High market share gives benefits ofeconomies of scaleand better bargaining powerin relations to the suppliersand customers for the organization

BCG matrix displays position of each business in the twodimensional matrix

BCG Growth Share Matrix


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?

$

High Low

Market Share

M

arket

G

rowth

High

Low

STARS QUESTION MARKS

Cash Cows Dogs



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BCG Growth- Share Matrix.

Business units after due considerations, get classifiedinto one of the four quadrants ( categories), viz; Cashcow, Stars, Question Marks, and Dogs.

Cash Cows

These business units hold large market share in amature & slow growingindustry

Have strong business position & negligible investmentrequirements. Hence returns from these businesses

far outstrips their investment requirements Cash cows are tapped for drawing out resources

required elsewhere in the organization.



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Stars These businesses have large market share in

growing industries

Since industry is growing, to maintain/ grow the

market share, firm needs to invest

Often investment requirements of Stars are greaterthan revenues

Once the industry reaches the stage of maturity, the

stars hardly needs any investment and become majorrevenue generators



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Question Marks These businesses have a small market share in a

high growth market.

They demand significant investment because their

cash needs are high, a norm in growing industries However, acquiring market share is easier in high

growth industry than in a mature market

However the chances of success has lot ofuncertainties

Only a few question marks are finally able to growinto stars



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Dogs These businesses have low market share in an intensely

competitive mature industry

Characterized by low profits

A dog does not need much capital investment, but it ties up

capital that could be invested in industries with better returns Firms concentrate on recovering as much as possible from these

and undertake ruthless cost cutting

Unless there is an over riding larger purpose, an organizationshould divest dogs

Well managed dogs( eg; those having strong control overcosts, focus on niches) can be reliable revenue generator.Yet the poss ib i l ity of being transform ed into a cash cow

does not exist.



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BCGs basic strategy recommendation was to maintain abalancebetween cashcows ( ie; mature businesses)and stars, while allocating some resources to feedquestionmarks ( that is, potential stars). Dogs are to besold off.

Since the producer with the largest stable market shareeventually has the lowest costs and greater profits, it isbecoming vital to have a dominant share in as manyproducts as possible.

Market share in slow growing market can be gained onlyby reducing the share of competitors, who are likely tofight back.

.



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If a market is growing rapidly, a company can gainshare by securingmost of the growth. Thus , whilecompetitors grow, the company can grow even fasterand emerge with a dominant share when growth

eventually slows

Shortcom ings o f BCG matr ix


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BCG Matrix is based on the basic logic that relativemarket share is l inked direct ly to cash generat ionand prof i tabi l i ty. The firm with the largest cumulativevolume gains the benefits of the experience of theexperience curve first, so market share is critical.

BCG Matrix has been criticized for over-s impl i f icat ion.Firstly it usesjust two performance measures. Secondly,direct & inevitable relation between market share and

profitabilityis questioned by some. Besides, relative market share & industry growth rates,

there are wide range of other variables. This matr ixtakes no accoun t of di f ferent iation or fo cusstrategies; it seems to relate best to cost based

strategies where price competi t ion is severe andexperience curve effects are signif icant.

Companies in focused niches can also have lowoperating costs.

There can be practical difficulties in decidingwhats exactly high and low ( growth and


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what s exactly high and low ( growth andShare) can mean in a particular situation.

In many organizations besides cash, theinnovative capacity is a critical resource, whichconsists of time & creative energy of theorganizations managers & designers. Stars &Question marks are very demanding on the

types of resources. Sometimes dogs are retained to complete

product range and a credible presence in themarket. They may also be held for defensive

reason to keep competitor out. Synergy of the SBU combination? Behavioral implication creation / management of

balanced portfolio?

Developments at GE


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Development s at GE

In1968, CEO of GE asked McKinsey to examineGEs corporate structure.

At that time GE consisted of 200 profit centersand 145 departments arranged around 10

groups. Boundaries of these units had beendefined around financial control aspects.

McKinsey study recommended a formal strategicplanning system, which will divide the company

into natural business units, later renamedstrategic business units ( or SBUs)

GE Nine-Cell Planning Grid(also called GE-


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g (Mckinsey nine-block matrix)

This is an adaptation of BCG approach. In 1971, GEasked Mckinsey to evaluate strategic plans for i tsSBUs. GE had already considered using BCG matrix todecide on the fate of its SBUs but its top managementhad decided that they could not set priorities on the basisof just two performance measures. After studying theproblem for 3 months, a Mckinsey team produced whatcam to be known as nine-cell matrix.

The nine-cell approach used approximately one dozenmeasures to screen for Industry attract iveness andanother set of measures to screen for Businessstrengthor competitive position, although the weightsattached to those measures were not specified.

This nine-cell grids thus makes an effort to overcomesome of the limitations of BCG matrix.

GE Nine-Cell Planning Grid


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For assessing industry attractiveness, itconsiders following factors Market size and growth rate, industry prof i t

marg ins, competitive intensity, seasonality & cyclicalqualities, Barriers to entry, Economies of scale,

technology, social, environmental, legal, political andhuman impacts.

For assessing business strength orcompetitiveposition, following factors were used Relative market share, prof i t margin, customer &

market knowledge ,ability to compete on price orquality, technological capability, image, competitivestrengths and weaknesses, caliber of management

Process for deploying Nine-Cell


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grid analysis

First identify factors contributing to theindustry attractiveness.

Next assign weights to each attractiveness

factorbased on its perceived importancerelative to other attractiveness factors.

Favorable to unfavorable future conditions areforecasted and rated based on a 0 to 1 scale

Obtain a weighted composite scoreforabusinesss over all industry attractiveness

Industry Attractiveness Factors


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Industry Attractiveness Factors

Industry attractiveness factor Weight Ratings Score

Market size 20 0.5 10.0

Projected market growth 35 1.0 35.0

Technological requirements 15 0.5 7.5

Concentration ( a few largecompetitors)

30 0 0

Political and regulatory factors Must benonrestrictive

Total 100 52.5



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GE Nine Cell Planning Grid A similar procedure is followed in assessing the

Business strength Once the comprehensive score has been

calculated, the scores are classified intocategories such as high, medium or low in termsof projected attractiveness of the industry andprojected strength of business.

Then business units are classified into threecategories: First : Invest / grow Second: Invest selectively and manage for

earnings Third : Harvest or divest for resources

B i l ifi d I t / i


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Businesses are classified as Invest / growgivensame preference as Stars in BCG matrix.

Harvest / divest category is managed like dogsin BCG matrix.

Businesses classified in the selectivity/earnings

category are treated either as cash cows or asquestion marks

Each Business of the firm is represented by a

Circle in the nine-cell grid. The Size ( area) of

the circle represents the SIZE of The Industr y&the shaded area indicate the market shareof

the firm in the industry.

Business Strength Factors


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Business Strength Factors

Business Strength factor Weight Ratings Score

Relative Market share 25 0.5 12.5

Profit Margin 25 0.8 20.0

Customer & Mkt knowledge 15 0.7 10.5

Technological capability 20 0.6 12.0

Image 15 0.75 11.25

Total 100 66.25

Industry ( product market) Attractiveness


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Invest /Grow Invest/Grow

Grow

selectively/mange earning

Invest/Grow

Grow

selectively/

mange earning

Harvest/divest

Grow

selectively/manage for

earning

Harvest /

divestHarvest /

divest

High Medium Low

Business

Strength

Weak

Average

Strong

GE / McKinsey Nine Cell Planning Grid

More sophist icated but more di f ficul t to


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interpret

As the axes in the GE-Mckinsey matrixbecome more complex & multi-dimensional, the advantage of clarity of

simple BCG matrix is somewhat lost Although it looks more sophisticated

model, it is not easy to plot businesses on

the matrix and to interpret what eachposition means.

Different perspectives


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Different perspectives

Strategic implications of Industryenvironments differ most strongly along anumber of key dimensions:

Industry concentration State of maturity of the Industry

Exposure to international competition

The Industry Life Cycle Model


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y y

Stages in the industry lifecycle:

Arthur D. Little Life Cycle Approach


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This approach to Portfolio Managementtakes into consideration the businessenvironment in terms of stage of life cycle

the business is currently in.



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Life cycle

stage

Position

Embryonic Growth Mature Aging

Dominant

Strong

Favorable

Tenable

Weak

The Life Cycle-Competitive


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Strength Matrix

Stage of Market Life Cycle

Introduction Growth Maturity Decline

High

Low

Descri ption of

Dimensions

Stage of Market Life

Cycle:

CompetitiveStrength: Overall

subjective rating,

based on a wide

range of factors

regarding the

likelihood of gaining

and maintaining a

competitive

advantage

Directional Policy Matrix developed by Shell (UK)


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Here the two axes of the matrix are

Business Sector Prospects Companys competitive abilities

A number of factors such as market growth,market quality, market supply and so on , are

used to rate the business sector prospects asunattractive , average, or attractive. Similarly,companys abilities are judged as weak,

average, or strong The 3x3 matrix forms the basis for classifybusinesses / major product group.

Different Roles of the Corporate Parent


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p

Portfolio Manager Restructurers

Synergy Managers

Parental developers

Strategic Analysisat Business level.. Business level Analysis : once business units are


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Business level Analysis : once business units areclassified into invest, hold, divest and harvest categories,SWOT analysis is employed to identify grand strategy

options at the business level A SWOT analysis summarises the key issues from the

business environment (using Pestel & Industry analysis)& and the strategic capabilities of an organization that aremost likely to impact on strategy development. ( strategiccapability is about the ability to provide products with features that are valued bycustomers, provide competitive advantage if it can do better than competitors)

Understanding What customers value or might value infutureis important . This includes customers thresholdrequirements. It also include critical success factorsthose factors that customers particularly value and,

therefore, where an organization must excel to outperformcompetition.What customer values will change with time. However,there may be opportunities to exploit core competencies innew markets or arenas

SWOT Analysis


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SWOT analysis is grounded in the basic principle thatstrategy-making efforts must aim at producing a good fit

between a companys resource, capability ( as reflectedby its balance of resource strengths and weakness) andits external situation .

SWOT analysis forces managers to better understandand respond to those environmental factors ( that may beeither inside or outside the organization) have thegreatest importance for the firms performance. Theseare strategic issues.

Strategic issues rarely arrive on a top managers desk

neatly labeled. Instead data from SWOT analysis identifynew technologies, market trends, new competitors, andemployee morale trends etc. They require interpretationand translation before they are labeled strategic.

SWOT Analysis Diagram


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y g

Numerous environmentalopportunities

Major environmental threats

Critical internal

weaknesses

Substantial

internal

strengths

Cell 3: Supports a

turnaround-oriented

/ eliminate weaknessstrategy

Cell 4:Supports a

defensive strategy

Cell 1: Supports

an aggressive

strategy

Cell 2: Supports a

diversification /

use current

strength to build

long term adv

strategy

STRATEGIC CAPABILITY** External environmentinfluences an organizations

St t i d l t b ti b th i i &


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Strategic development by creating both oppor tun i t ies &threats.

However, suc cess of strategyis heavily dependent onthe organization having or developing the strategiccapabi l i tyto perform at the level that is required forsuccess.

Strategic Capability is the adequacy and suitability ofthe resources and competences of an organisation for itto survive & prosper.

Many of the issues ofstrategy development areconcerned with changing strategic capabi l itybetter

to fit a changing environment 1990s adjustment to strategic capability through

adopt ion of new technolog ies in m fg indu str iestoincrease labor productivity; in 2000sadopt ion of IT byservice indu stry to s tay in the bus iness.


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In fast moving ( hypercompetitive) world

the only really enduring capability is theability to change strategyas the basis of

competition moves through different

phases of the cycle of competition. Indeedstretching IT capabilities andhypercompetitive behavior have been thebasis of dot.com companies.

The Roots of strategic Capability

Strategic Capability is about providing products


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Strategic Capability is about providing productsor services that are valuedby customers or

might be valuedin the future. The ability toperform at the level required for success. It isunderpinned by the resourcesandcompetenc iesof the organization.

What cus tomers valueis the starting point forunderstanding strategic capability

Firstare the threshold product features thatall potential providers must be able to offerto

stay in a particular market orsegment. Eventhese are changing and becoming moredemanding over time.

The secondare the Crit ical Success Facto rs,which are the features that are particularly


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which are the features that are particularlyvalued ( form the basis of selection ) by a group

of customers and, therefore, where theorganizat ion must excel to ou tperform thecompet i t ion.

Since different Customer groups value differentproduct features, organizations will need to

compete on different bases, and throughdifferent resources & competencies.

Supermarkets follow strategies which provide-lower prices and one-s top shoppingthrough

theirresources (store location, scale , productrange) and competencies ( knowledge ofmerchandising, skill of low cost sourcing &computerized supply chain systems)


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Corner shop grocery store gains Competitive

Advantage over supermarkets by concentratingon those custom ers whose CSFs are di f ferentaspects of serv ice-like,personalized service,extended opening hours, informal credit, home

deliveries etc. This strategy may be underpinned by unique

resources ( such as shop location, the marketknowledge of owner) and core competence ( thepersonal style and customer relationshipssustained by the owner)

Key Success Factors


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y

An industrys KSFs ( or CSFs) are those that most affectindustry members ability to prosper in the market place.

KSFs by their nature are impo rtant to al l f i rms in thatindustry or segment of the indu stry .

Determining the industrys KSF, given prevailing andanticipated industry and competitive conditions, is a top-priority analytical consideration

A sound strategy incorporates efforts to be competenton all indus try KSFsand to excel on at least one

factor KSF for an industry at any point of time should not be

more than 3-5 in numbers

Identifying KSFs

Pre-requisites for success


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Pre requisites for success

What do customers Want?

Analysis of demand

Who are our customers?What do they Want?What do they Value most?

How does the firmSurvive competition?

Analysis of competition

What drives competition?What are the main dimens ion

of competi t ion?

How intense is competition?How can we obtain superior

competitive position?

Key Success Factors

Identifying KSF for Supermarkets


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y g p

What do customer want? ( analysis ofdemand)

Low prices

Convenient location Product range adapted to local customer

preferences

Freshness of produce Cleanliness, service and ambience


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How does a firm survive competition(Analysis of competition)

Customer price sensitivity encourages

vigorous price competition Excise of bargaining power an important

influence on input cost

Scale economies in operation andadvertisement

Markets localized & concentration high

Identifying KSFs for supermarkets


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Key Success factors

Low cost operation requires : Operational efficiency

Scale-efficient stores

Large aggregate purchases to maximize buyingpower

Low wage costs

Differentiation requires

Large stores ( to allow wide range of products Convenient location

Easy parking

Common types of KSFs


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ypTechnologyrelated KSFs

Scientific research expertise ( important in Pharmaceuticals, Hi-techindustries, Telecommunication industry etc)

Technical capability to make production process innovation

Product innovation capability

Expertise in a given technology

Manufacturing-related KSFs Low cost production efficiency ( achieve scale of economies, capture

experience curve effects)

Quality of manufacture ( fewer defects, less need for repairs)

High utilization of fixed assets ( important in capital intensive

industries / high fixed cost industries) Low cost Plant locations

Ability to deliver products customized to buyer specifications (flexibility in manufacturing system)

Low cost product design and engineering capability( reducesmanufacturing cost)

Common types of KSFs Access to adequate supply of skilled employees


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High labor productivity

Distribution related KSFs

A strong distribution network of wholesalers/ dealers Gaining ample space on the retailers shelves

Low distribution cost

Accurate filling of customer orders

Short delivery times

Having company owned outlets Integrated distribution information system

Marketingrelated KSFs

Courteous customer service

Fast accurate technical assistance

Breadth of product line and product selection

Attractive styling or packaging

Clever advertising

Accurate filling of buyer orders ( few back orders or mistakes)

Merchandising skills



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Skills-related KSFs

Superior workforce talent ( important in professional services like

Accounting and investment banking) Quality control know how

Design expertise ( important in fashion and apparel industry , oftenone of the keys to low cost manufacture)

Expertise in a particular technology

An ability to develop innovate products and product improvementsOrganizational Capability

Superior Information System ( vitally important in airline, car rental,credit card, Hotel & financial sector industries)

Ability to respond quickly to shifting market ( stream lined decision,

short lead time to bring new products) Managerial experience

Superior ability to deploy e-commerce technologies



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Other types of KSFs

Favorable image or reputation with buyers Covenient locations ( important in many retailing

businesses)

Overall low cost operations( not just in manufacturing)

Access to financial capital Patent protection

Pleasant, courteous employees in all customer contactposition

KSFs vary from industry to industry and even from time totime within the same industry as driving forces and

competitive conditions change.

SF ExamplesK


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In the real estate development industry, acquiring landand maintaining liquidity are the two key success factors.If every other factor concerning the business of thedevelopment company is just average, but the land iswell located and the firm maintains adequate liquidity,the company will do well. Not that the developer

shouldn't attempt to deliver a well-constructed productwith good financing. He should. But nothing is a greaterdeterminant of success than having, or not having, theright piece of land, and remaining in a liquid position.

Knowing the importance of land acquisition to his company'ssuccess, the Chairman of one of leading real estate developerinstructed his managers, "Before you commit to the purchase of anypiece of land, I want to walk on it."

KSF Examples


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Beer/Brewing Industry Utilization of brewing capacity - to keep manufacturing

costs low

Developing a strong network of wholesale distributors -

to gain access to retail outlets Clever advertising - to induce beer drinkers to buy a

particular brand

Resources , competencies

Experience shows that resources and


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Experience shows that resources andcompetencies tend to be easy to imitate in the

medium term. Consequently, CompetitiveAdvantage needs to be secured by continuallyshifting the ground of competition.

So a core competence could be theprocess of

innovation which requires the ability to linktogether many separate areas of knowledgesuch as brand development, marketing andfinancial services.

Has an Organization the resources and competencies toid d t / i th t t th t


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provide products / services that meet the customerrequirements? Organization capability starts with

resources : Available resources to an organization, from both

within and those that can be accessed (network ofpartners, contacts) , to support its strategies

Threshold resources resources needed to stay in the

business, otherwise unable to serve particular markets.Threshold standards rise with time.

Unique resources to meet cr i t ical suc cess factorsof a part icu lar segmentand create compet i tiveadvantages. These are difficult to imitate.

Inadequate resources Resources that do notadequately underpin the meeting of threshold productfeatures. They may be adequate for other segments.

Redundant resourcesthese are no longer necessaryor valued

Competence is created when resources aredeployed into activities and into processes


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deployed into activities and into processesthrough which these activities are linkedtogether. Usually, the key to good or poorperformance is found here than in the resourcesper se.

Although an organization will need to reach athreshold level of competence in all activitiesthat it undertakes, only some of these activitiesare core competences.

Core competences are those competencesthat underpin the organizations ability tooutperform competitors by meeting the CSFsbetter than competitors.

Core Competencies might also provide basis on


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p g pwhich strategies might be builtto exploit

opportun i ties in o ther marketswhere the sameorsimi larcritical success factors are valued.

Core competencies might also be the basis forcreating opportunities in new arenas where the

same CSFs would be valued above those thatcurrently prevail. In other words, to change therules of the game in those new arenas.

What customers value will change with time, so

core competences willbe eroded. However,there may be opportunities to exploit corecompetencies in new markets or new arenas.

Same as competitors Better than competi tors


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orEasy to imitate

andDifficult to imitate

Resources

Competencies

Thresholdresources

Uniqueresources

ThresholdCompetencies

Core

Competencies

Difference in performance between organizations


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Difference in performance between organizationsin the same market is rarely explained by

differences in their resource base sinceresource can usually be imitated or traded.Superior performance will be determined by theway in which resources are deployedto create

competencesin the organizations activities. For example, knowledge of an individual will not

improve an organizations performance unless heis assigned ( or allowed) to work on particular

tasks which exploits that knowledge, or moreimportantly, is able to share that knowledge withothers who can build on it.

Performance is also affected by the process oflinking separate areas of knowledge & activities


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linking separate areas of knowledge & activitiestogetherboth inside and outside theorganization.

Although an organization will need to achieve athreshold level of competence in all of theactivities & processes that support the product &

service, only some will be core competence. Core competence are act iv i t ies o r p rocesses

that critically underpin an organizationscompet i tive advantage. They create & sustainthe ability to meet CSF of particular customergroup better than other providers that are difficultto imitate.

Core competencies must fulfill the followingcriteriaTh t t l t t ti it


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The competence must relate to an activity orprocess that fundamentally underpins the valuein the product or services featuresas seenthrough the eyes of the customer

The competence leads to levels of performancesignificantly better than competitors. (

Benchmarking may help in understandingperformance) The competence must be robust i.e; difficult to

imitate. Robustness will be greater where

competences are embedded to the extent thatmanagers themselves have difficulty in fullyexplaining what underpins success.

CSFs( product features that are particularly


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valued by customers) like good services ,

reliable delivery are easy to understand. Butcore competences are about the activities thatunderpin the ability to meet these critical

success factors, not the factors themselves.

Core competence may be embedded deep in anorganization at an operation level in the workroutines of the organization.

They are hidden to the extent that the managersthemselves may not explicitly understand them.

How Resources and Capabilities Provide

Competitive Advantage


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The firm is organized appropriately to obtainthe full benefits of the resources in order torealize a competitive advantage

Valuable Allow the firm to exploit opportunities orneutralize threats in its external environment

Rare Possessed by few, if any, current andpotential competitors

Costly to imitate When other firms cannot obtain them ormust obtain them at a much higher cost

Nonsubstitutable

Resources and Capabilities, Core Competencies,and Outcomes


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and Outcomes

CoreCompetencies

Competitive

Advantage

Value Creation

Above AverageReturns

Valuable

Rare

Costly to Imitate

Nonsubstitutable


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Internal Analysis of the Firm


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Before a firm can start tapping the opportunities providedby the external environment, it has to know its owncapabilities, strengths and weaknesses. Internalappraisal has three distinct parts: Assessment of the strengths & weaknesses of the firm , in

different functional areas Appraisal of the status / health of the individual businesses of the

firm

Identification and assessment of the firms competitiveadvantage and core competence.

Internal analysis is also the starting point for developingthe core competencies (and competitive advantages)required for survival and growth of the firm

SWOT Analysis Diagram


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Numerous environmental

opportunities

Major environmental threats

Critical internal

weaknesses

Substantial

internal

strengths

Cell 3: Supports a

turnaround-oriented

/ eliminate weaknessstrategy

Cell 4:Supports a

defensive strategy

Cell 1: Supports

an aggressive

strategy

Cell 2: Supports a

diversification /

use current

strength to buildlong term adv

strategy

SWOT Analysis is a traditional approach that has beenin se for decades to help in internal analysis It offers


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in use for decades to help in internal analysis. It offersa general ized effo rtto examine internal capabilities inlight of external factors, most notably key opportunitiesand threats. Though still used by many, SWOT analys ishasl imi tat ionsl inked to the r igor and depth of

analysisand ther isk of over looking key

considerat ions.

A SWOT analysis can ov eremphasize internal strength s and

dow nplay external threats

A SWOT analysis can overemphasize a single strength o r

element of strategy

A strength is not n ecessari ly a source of com pet it ive

advantage

A SWOT analysis can be stat ic and can r isk ign or ing

changing ci rcumstances

Two techniques have emerged that can help


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Two techniqueshave emerged that can help

overcome some limitations of SWOT analysis by

offering more comprehensive approach to identify &assess firms internal resources & capabilities in amore sys temat ic , object ive & measurable manner.

Value Chain analysis

Resource-based View (RBV)is based on the premisethat firms build competitive advantage based on uniqueresources, skills, and capabilities they control or develop,which can become the basis for unique, sustainable

competitive advantages that allow them to craftsuccessful competitive strategies

Value Chain Analysis


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Primary

and

Support Activitie

s

in the

Value

Chain

SupportActivities{

Procurement

Technological Development

Human Resource Management

Firm Infrastructure

Primary Activities{Inbo

undLogistics

Operations

OutboundLogistic

s

MarketingandSales

Service

Value Chain Analysis A Business is seen as a chain of activities ( primary and

support activities) that transforms inputs into outputs


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support activities) that transforms inputs into outputs,that customers value.

Value chain analysis analyzes to understand how abusiness creates customer value by examining thecontributions of different activities within the business tothe total value. Proponents of VCA believe it allows

managers to better identify their firms competitiveadvantages by looking at the business as a process achain of activities.

Costs / resources incurred in each activity , identify

activities or elements within that which differentiate thecompany, as well as where company has weakness vis--vis the competitors. Spot areas of improvement.

What is the Resource-based Viewof the Firm?


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of the Firm?

Firms differ in fundamental ways

because each firm possesses a

unique bundle of resources tangible and intangible assets and

organizational capabilities to make

use of those assets

Resource Based View (RBV)

Three basic resources : Tangible Assets,


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Three basic resources : Tangible Assets,Intangible Assets, and OrganizationalCapabilities.

RBV method of analyzing and identifying a firmsstrategic advantages based on examining its distinctcombination of assets, skills & capabilities and

intangibles.

Organizational capabilities are not specificinputs like tangible or intangible assets, rather

they are the skills the ability and ways ofcombining assets, people, and processes thata company uses to transform inputs into outputs.

What makes a resource valuable?


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What makes a resource valuable?

1. Are critical to meet a customers need betterthanother alternatives

2. Are Scare few others, if any, possesses thatresource or skill to the degree your firm has

3. Drive a key portion of overall profits, in a mannercontrolled by your firm

4. Are relatively more durable or sustainable over time

Wal- Marts Resource Based Competitive Advantage


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Tangible

Intangible

Capabilities

Resources Industry Avg cost WalMart cost

( % of sale)

Store Locations

Brand reputationEmployee Loyalty

Inbound Logistic s

0.3 ( store rental space)

1.2 ( advertising expenses)1.1 (payroll expenses)0.7 ( Shrinkage expense)

1.2 ( distribution expenses)

Total Advantage = 4.5%

Internal Analysis: MakingMeaningful Comparisons


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Meaningful Comparisons

Perspectives

to use

1. Comparison with past

performance

2. Stages of

industry evolution

3. Benchmarking

comparison with competitors

4. Comparison withKey Success Factors

in industry

Benchmarking Benchmarking has revolutionized the culture of business

world over


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world over Benchmarking is based on premise that in all processes

including procurement, production, sales and services,one or other organization has achieved world classcompetitiveness.

Bmarking is a process for improving performance byconstantly, identifying understanding and adapting best

practices and processes followed inside and outside thecompany and implementing these adapted practices.

Emphasis is on exploiting best practices that lead tobest performance, and not merely measuring bestperformance.

It is a continuous process of learning, feedback,reflection and analysis of what works( or does not work)and why

What is Benchmarking?



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"Benchmark ingis a tool to help you improve yourbusiness processes. Anybusiness process can bebenchmarked."

"Benchmark ingis the process of identifying,understanding, and adapting outstanding practices

from organizations anywhere in the world to help yourorganization improve its performance."

"Benchmark ingis a highly respected practice in thebusiness world. It is an activity that looks outward tofind best practice and high performance and then

measures actual business operations against thosegoals."

A Company can compare its total organization or part of it withothers and adopt one or more of the following types ofbenchmarking


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Strategic Benchmarkingstudying strategies & long term

approaches that helped the best practice companies to succeed.Examine the core competencies, product development andinnovation strategies of such companies

Competitive or performance benchmarking compare theirposition with respect to the performance characteristics of keyproducts & services , involving companies from SAME SECTOR

Process benchmarking to improve specific key processes andoperations with the help of best practices organizations involved insimilar work or offering services

Functional ( generic) Bmarking- improve their process bycomparing with companies from DIFFERENT business sectors

involved in similar functions or work processes. ( eg Safetypractices)

Internal Benchmarking against own units, easy to get data

External bmarking help of high end performers/ successful Cos

International bmarking

Many business processes are common throughoutindustry For example; NASA has the same fundamental


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industry. For example; NASA has the same fundamental

Human Resources requirements for hiring anddeveloping employees as does American Express.British Telecom has the same Customer SatisfactionSurvey process as Brooklyn Union Gas. Theseprocesses, albeit from different industries, are all

common and can be benchmarked very effectively. It'scalled "getting out of the box".

By early 1990s, many Fortune 500 were implementingbenchmarking. Benchmarking also became a key

criterion for Malcolm Balridge Quality award. Xerox, ford,GE, AT&T, Motorola, citicorp early users

Capabilitiesrefer to a companys skills at coordinatingits resources and putting them to productive use. Theseskills reside in an organizations rules, procedures ,


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g , p ,styles or manner through which it makes decisions and

manage internal processes. More generally, Capabilities are result of a firms

organizational structure, processes, and control systems.Kind of behaviors that are rewarded, process of decisionmaking, cultural norms and values

Capabilities are intangible. They reside not so much inindividuals, as in the way individuals interact, cooperate,and make decisions within the context of anorganization.

A company may have firm specific and valuable

resources, but unless it has the capability to use thoseresources effectively, it may not create distinctivecompetency.

The Roots of CompetitiveAdvantage


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Innovation


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The act of creating new products orprocesses

Product innovation

Creates products that customers perceive

as more valuable, increasing thecompanys pricing options

Process innovation

Creates value by lowering production costs

Perhaps the most important buildingblock of competitive advantage

Responsiveness toCustomers


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Doing a better job than competitorsof identifying and satisfyingcustomers needs

Superior quality and innovation areintegral to superior responsiveness tocustomers

Customizing goods and services to the

unique demands of individualcustomers or customer groups

Responsiveness toCustomers (contd)


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Sources of enhanced customerresponsiveness

Customer response time, design,service, after-sales service and support

Differentiates a company/itsproducts; leads to brand loyalty and

premium pricing

The Generic Building Blocks ofCompetitive Advantage


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How Resources and Capabilities Provide



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p g

The firm is organized appropriately to obtainthe full benefits of the resources in order torealize a competitive advantage

Valuable Allow the firm to exploit opportunities orneutralize threats in its external environment

Rare Possessed by few, if any, current andpotential competitors

Costly to imitate When other firms cannot obtain them ormust obtain them at a much higher cost

Nonsubstitutable

Resources and Capabilities, Core Competencies,and Outcomes


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CoreCompetencies

Competitive

Advantage

Value Creation

Above AverageReturns

Valuable

Rare

Costly to Imitate

Nonsubstitutable

Aspects to be covered in Strength-Weakness analysis


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The strengths and weaknesses of the firm have to be assessed in each

of the main functions / areas Marketing

Overall growthof the market Market standing / market share Innovation in marketing

Customer satisfaction level

Customer service level New product capability

Pricing / margins Channel position / distribution network Marketing communication on the whole advertising, sales promotion,

personal selling

Market Research Capability Marketing costs , Marketing organisation Productsmix and product lines

Product-wise position with respect to


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Profitability

Stage of product life cycle Product design / technological strength Differentiation Positioning Brand power

Finance Assets, liquidity, leverage, gearing, cash flow, cost of capital,

profitability, quality of financial management, tax planning

Manufacturing / Operations Capacity / scale of production, locational advantages, post

production facilities, Capacity utilization, cost of production, breakeven position, productivity, inventory management, flexibilty inmanufacturing, automation, availability of trained skills.

R&D


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Nature and depth of R&D capability

Resource allocated to R&D Quality, expertise and experience of R&D personnel Speed of R&D, capability of engineering products based on R&D Record of patents generated Comparison of R&D investment vs new product launched

Human Resources Morale & motivation of employees, personnel turnover, quality /expertise of personnel

Corporate / overall resources Company image , size, quality of top management, corporate

performance, innovation record, organization culture ,organizational structure, use of information technology, CEO,Board of directors, Overall adequacy of resources etc

Strategic Development Processes in

Organizat ions**

Strategic Planning Systems**: Often Strategy


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g g y gydevelopment is equated with Strategic planningsystem. This is manifestation ofDesignapproach to managing strategy. This takes formof highly systemized step by step, chronologicalprocedures involving many different parts of theorganization.

Formalized Planning provide a structured meansof analysis and thinking about complex strategicproblems, providing opportunity to managers toquestion and challenge the received wisdomthey take for granted.

It encourages a longer term viewof strategythan might otherwise occur. Planning horizons

I FMCG 3 5 b i t


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vary . In FMCG, 3-5 years may be appropriate.

In companies, which have to take very long-term views on capital investment, such as oilindustry, planning horizons can be as long as14 years ( in Exxon) or 20 years ( in Shell).

It can be a useful means ofco-ordination andhelp communicate intended strategy and createownership of the strategy by involving largenumber of people in development process.

Planning systems provide a sense of securityand feel of exercising control over the destiny ofthe organization.

Viewed through Experience lens, Planning mayhelp in drawing together experiences of people


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help in drawing together experiences of people

and ensure effective communication. Viewed from Ideas lens, Planning systemsprovide a selection mechanism by which newideas can be evaluated. New ideas andinnovations compete or prove their worth.

There are somepit falls also in the formalizationof strategic Planning process: Line managers, due to their pre-occupation with day

to day work, may actually cede responsibility forstrategic issues to specialist. This may result instrategic planning becoming an intellectual exerciseremoved from the reality of operations.

The process of Strategic planning may be socumbersome that individuals or groups in the firm might

t ib t t l t f it t d t d th h l


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contribute to only part of it not understand the whole.

Planners may overlook the cultural & political dimensionsof the organization , and also importance of experiencesof those in the organization.

Very formal system of planning, especially with tight

mechanism of control, can stifle ideas and havedampening effect on innovative capacity.

Planning can become obsessed with search for adefinitively right strategy.

Logical incrementalism**: In a study of majormultinational businesses, Quinn concluded that


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the strategic management process could be bestdescribed as logical incrementalism.

Managers have a view ofwhere they want theorganization to be in years to comeand t ry tomove towards this posi t ion incremental ly .

They do this by attempting to ensure thesuccess & development of a strong , secure butflexible core business while using the

experience gained to develop business andperhaps experiment with side bets. Encourageideas to emerge from lower levels as well.


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Strategic Leadership**

Strategic Development may also be strongly associatedwith an individual.


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A strategic Leaderis an individual upon whom strategydevelopment and change are seen to be dependent.Others in the organization willingly giving him theposition. In some organization the individual may beowner or founder, often in case of small businesses. In

some cases it could be an individual chief executive whohas turned around a business in difficult time.

The design lens suggests the individual carries out theanalysis & evaluation. These could be using his ownlogic or using techniques associated with strategic

planning & analysis.

The experience lens suggests that strategyadvanced by individual is formed on basis of the


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advanced by individual is formed on basis of the

individuals experience, perhaps within theorganization or perhaps from some otherorganization where he previously worked. Thestrategy advanced by a chief executive new to

an organization may be based on a successfulstrategy followed in previous organization.

The strategy of an organization may be more

symbolically with an individual, for examplefounder in a family controlled business.

Viewed from Ideas lens, Evolutionarytheorists emphasize the way in which the


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theorists emphasize the way in which the

strategies develop from competing ideas,so tend to diminish the role of so calledstrategic leader. However, a strategic

leader can provide the vision withsufficient clarity within which the discretionof others in the organization can be

exercised.

Organizational Politics**: The politicalview of strategy development is that


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view of strategy development is that

strategies develop as the outcome ofprocess of bargaining and negotiationamong powerful internal or externalinterest groups ( or stakeholders). This isthe world of boardroom battles portrayed infilms & TV dramas.

The design lens sees it as inevitable but

negative influence on strategydevelopment.

Experience lens helps to explain the likelihood of politicalactivity. People in organizations are rooted in theirexperience & therefore in approaching major problems,


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experience & therefore in approaching major problems,seek to be protective of their views preserving orenhancing the power of their positions.

Political activity may then seen as one explanation ofincremental, adaptive strategy development. Verysignificant change to strategy may be very threateningto the power of certain managers.

The experience lens also suggests that the analyticalprocesses that go into planning may not be entirelybased on objective and neutral facts.

Powerful individuals and groups may also stronglyinfluence the identification of key issues and indeed thestrategies eventually selected. Planning thus has apolitical dimension. Political activity has to be takenseriously as an influence on strategy development.

The ideas lens also suggests thatorganizational politics can be seen as


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organizational politics can be seen as

manifestation of the sort ofconflict thatresults from innovation and new ideas. Thevariety and diversity that exists in

organizations takes form in new ideassupported or opposed by differentchampions.

Imposed Strategy : Imposition of strategy byagencies or forces external to the organization.Government may dictate a particular direction eg:in public sector or when it chooses to privatise a


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in public sector or when it chooses to privatise a

PSU. MNCs are subjected to regulations in different

countries. An operating business within a multi-divisional organization might see overall

corporate strategic direction as an imposition onit. It might be argued that imposed strategy is a way

of overcoming the sort of strategic inertia that hadarisen as a result of strategies developing

incrementally based on history, experience orcompromises resulting from bargaining &negotiations of powerful groups.

Multiple Processes of Strategy Development**: First, there is no one right way. The way in which

strategies develop in a fast changingenvironment is notlikely to be same in an environment where little


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ychanges.

Second, it is very likely that the way the strategies aredeveloped will be seen differently by different people.

Senior executives tend to see strategies more in terms ofdesign, where as middle management tend to see themas a result of cultural political processes.

Managers who work for government organizations tendto see strategy as more imposed than those in theprivate sector.

There will be multiple processes at work. Even in apredominantly Planning system, some level of politicalactivity and certain elements of imposed strategy is likelyto be there.

Implications for Strategy Development

Intended and realized Strategies


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Strategic Drift Strategic Management in Uncertain and

complex conditions

Strategic Drift

Historical studies of organizations have shownprevalence of processes leading to emergent


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prevalence of processes leading to emergent

strategy. There are long periods of relative continuity

during which established strategy remainslargely unchanged or changes incrementally,there are also periods offluxin which strategieschange but in no very clear direction.

Transformationalchange, when there is afundamental change in strategic direction, doestake place but is infrequent.

The above pattern is known as punctuatedequilibrium.

There are strong forces at work which are likely to pushorganizations towards this pattern. Incremental strategicchange is a natural outcome of the influence ofexperience


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experience.

The influence of the paradigm and the way we do thingsaround here is likely to mean that faced with changes inenvironment, managers try to look for solutions with whichthey are familiarand therefore minimize the extent towhich they face ambiguity and uncertainty.

There is a danger that incremental strategic changes arenot enough to keep pace with environmental changes,and more fundamental or transformational change isneeded.

Indeed, often Transformational change tends to occur at

times when performance has declined significantly. Thereis a danger that Organizations under such pressure maybe acting reactively to the environment.

Some times strategic action required is outsidethe scope of current paradigm and existingculture, the core assumptions of managers.

Managers are more likely to attempt solutions by


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g y p y

searching for solutions within the existingparadigm & as last resort look for a new one asshown in exhibit 2.12

Strategic drift occurs when over a period, theorganizations strategy gradual ly moves awayfrom relevance, with respect to the forces in itsenvironment. Even most successful companiesmay drift in this way.

Indeed, there is a tendency which has become

known as the Icarus Paradoxfor businessesto become victims of the very success of theirpast.

See Exhibit 2.13 for phases of Strategic drift.

Organizations that seek to innovate could also


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sometimes face problems by developingproducts or services much ahead of itsenvironment ( market demand)

All these goes to emphasize the delicate

balance required while developing strategy.Internal cultural pressures tend to constrainstrategy development and at the same tome theorganizations need to cope with environmental

forces.

Strategic Management in Uncertain & complexcondi t ions

Different organizations face environments which differ inform & complexity. Since one of the main problems ofstrategic management is coping ith ncertaint the


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strategic management is coping with uncertainty, the

above aspect is very important. In simple / static conditions, the environment is easy to

understand & does not undergo significant change. Rawmaterial suppliers & some mass manufacturingcompanies are examples. Technical processes may be

fairly simple and competition & markets change very little.If environmental changes does occur, analysing pasthistorical patterns / forecasting helps predict them .

In situations ofrelatively low complexity, it may also bepossible to identify some predictors of environmental

influences. For example birth rates is a good indicator todetermine provision for schooling. So in simple / stat ic cond i t ionsstrategy development

in design termsmay make sense.


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Organizations in Complex situations face anenvironment difficult to comprehend. They mayface dynamic conditions too, and thereforecombination of complexity & uncertainty A


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combination of complexity & uncertainty. A

multinational firm or a government authority withmany services, may also be in a complexcondition because of diversity, while differentoperating companies within it face varyingdegrees of complexity & dynamism

Difficult to handle complexity by relying only onanalysis & planning. So organizational designis important. Decentralization with different partsof the organization made responsible for

different aspects & given the resources andauthority to handle their own parts.

Organizations have to learn to cope withcomplexity in different ways. Top


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management has to recognize thatspec ial is t down the l ine know more

abou t the env i ronment know more than

they do. This strategic competence basedon experience may provide competitiveadvantage . Taken-for-grantedhas to bechallenged

Simple Complex

ENVIRONMENTALCONDITIONS

Strategy developm ent in environmental contexts


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Static

Dynamic

Historical AnalysisForecasting

ScenarioPlanning

Decentralization ofOrganization

Experience &Learning

Formulation of long term strategies


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Grand Strategiesprovide basic directions oroptions available for a company for strategicactions. Grand Strategies are long termstrategies to achieve companyslong termobjectives ( also called master strategies or businessstrategies)

They can be broadly classified into 3 categories stability strategy / Consolidation

Growth strategies

Retrenchment strategies

Or a combination of the above

Ansoffs Product Market Matrix for Growth


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Present Product New Products

Present

Market

New

Markets

Market Penetration Product Development

Market development Diversification

Grand Strategies..

Concentration


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Concentration Market development Product development Horizontal Integration acquiring similar

businesses, same stage of Production Marketing chain Vertical Integration forward , backward Tapered Integration QuasiIntegration

Diversification Concentric diversification- synergy Conglomerate diversification


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JVs Strategic Alliances

Consortia

Turnaround Divestures

Liquidation

Quasi Integration Quasi integration refers tothe establishment of a relationship / alliance


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the establishment of a relationship / alliancebetween vertically related businesses (partners).some of the common forms of quasi integrationare: Minority equity investment

Loan or loan guarantees Pre-purchase credits Exclusive dealing arrangement Specialized logistic facilities

Co-operative R&D Benefits of Quasi Integration?

Turnaround Strategy


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A turnaround strategy is done

through

Cost reduction Asset reduction

Behavioral considerations affecting strategic

choice Strategic analysis rarely identifies one specific


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superior strategy. Different alternatives withdifferent or similar looking payoffs emerge.Under such circumstances, various factorsinfluence the choice. Some of the factors: Role of past strategies : inclination towards

continuity of past strategy.Thats why Firmssometimes replace key executives whenperformance of the firm is in adequate over extendedperiod. On the other hand, more successful thestrategy becomes, harder is to replace it even underchanged circumstances

Perception of KSFs & Distinctive competencies


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analyzing the business environment

Documents