part 2-business strategy

Part 2

Topics included for Internal Examination (Slide no. 2 to 25)

Scheduled on 14th July

Identifying SBUs• Strategic Business unit or SBU is understood as a

business unit within the overall corporate identity which is distinguishable from other business because it serves a defined external market where management can conduct strategic planning in relation to own products and markets. – The unique small business unit of a large corporate can benefit

from its unique structure, which helps it to aggressively focus on its business in a consistent matter.

• When companies become really large they are best thought of being composed of a number of business units.

Strategy Definitions-by Management Experts

• Objective Inclusive Definitions:- Includes objective settings as mentioned by– Chandler:-

• Strategy is the definition of the basic long term goals and objectives of an enterprise and the adoption of the courses of action and the allocation of resources necessary for carrying out these goals.

– Andrews:-• Strategy is the pattern of objectives, purpose or goals and

major policies and plans for achieving these goals, stated in such a way so as to define what business the company is in or is to be.

Definition by Experts• Objective Exclusive Definition-A forward looking endeavour

to gain future advantage by relating its effort with the environment. – Michael Porter

• Strategically positioned company is the one which performs different activities from competitors or performs similar activities in a different way to create value for the organization.

– Ansoff• Strategy defines the essential nature of business the organization is

presently in and is planning to be in future

– Glueck• A strategy is a unified, comprehensive and integrated plan relating the

strategic advantages of the firm of challenges of the environment. It is designed to ensure that the basic objectives of the firm are achieved.

Strategy Operating at different Levels of Organizations

• Typical example of a large organization with Corporate and Business level operations

• Corporate Strategy is the responsibility of the Corporate Management• SBU Strategies are the responsibility of the SBU Top Management• Functional level strategies are the responsibilities of the functional heads

within the broad parameters set by the Corporate and SBU heads

Corporate Strategy

SBU 1 Strategy SBU Strategy 2 SBU Strategy 3

Operation Strategy Mktg. Strategy Financial Strategy

Characteristics of Strategic Decisions

Different levels requires different level of skills and behavior. Impacts of such strategies on the future of the business are also different.

Dimensions Level Of Strategy

Corporate SBU Functional

Types of Decision Conceptual Mixed Operational

Impact Critical Major Minor

Time horizon Long range Medium range Short range

Risk Involved Very high Medium Low

Profit Potential High Medium Low

Flexibility High Medium Low

Organization as an Open System

• Companies consists of interrelated interdependent parts that function as a whole.

• Takes inputs from various sources, process it, and produce output--tangible or intangible, and also produce waste and pollution.

• As an open system, a company is affected by its environment and also impacts that environment.

• The various studies of organizational environments can be summarized from two different perspectives:

• The environment as a source of resources, and • The environment as a source of information

Managing Resources and Information from Environment

- A Strategic Challenge• Resources--Organization depends on resources from the

environment, which are generally scarce and sought by competing organizations. – MEASURE-The level of dependency is determined by difficulty of

obtaining and controlling resources.• To manage environmental resources it is necessary to know about the

environment before attempting to change or influence it.

• Information--A key aspect of the environment from the information perspective is the environmental uncertainty. – MEASURE- The amount of change ( dynamic or stable) and the

number of components in the environment (complex or simple) measure uncertainty.

• The more complex and dynamic the environment, the more uncertain it is.

Managing Resources and Information from Environment

- Management role• Management’s ability to recognize and anticipate

environmental changes plays a key role in shaping the company’s future because it limits or opens up strategic options.

– As a result , understanding the external environment can help improve a company’s competitive position, buffer the company from environmental impacts and build bridges to stakeholders of the company.

The Components of External Environment

• General Environment• External analysis efforts should be focused on segments that are most

important to the company’s strategic competitiveness to identify environmental changes, trends, opportunities and threats that can be matched successfully with the company’s resources , capabilities and core competencies so that it can achieve strategic competitiveness and earn above-average returns.

• Any analysis of the general environment and its segments should recognize global elements that may have an impact on the company

• In addition to increasing a company’s awareness and understanding of an increasingly turbulent, complex, and global general environment, External Environment Analysis is also necessary to enable the company’s management to interpret information to identify opportunities and threats.

The component of External Environment- contd.

• Industry Environment• An industry is a group of companies producing products that are close

substitutes for each other. As they compete for market share, the strategies implemented by these companies influence each other and include a broad mix of competitive strategies , which push the industry competitiveness and result in above-average returns.

– Unlike the general environment, which has an indirect effect on strategic competitiveness and company profitability, the effect of the industry environment is direct. Industry and individual company profitability and the intensity of competition in an industry are a function of five competitive forces of Porter’s Five Forces Model of Competition.

• Porter’s model indicates that these five forces interact to determine the intensity or strength of competition, which ultimately determines the profitability of the industry.

Porter’s Five Forces

According to Porter these are Micro Environment

The purpose of Five-Forces Analysis

• The five forces are environmental forces that impact on a company’s ability to compete in a given market.

• The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.

• Competition may be viewed differently. An analysis of competitive forces in an industry must expand beyond the traditional practice of concentrating on direct competitors to include potential competitors. e.g.– Supplier by integrating forward or Customer by integrating

backward etc.

Threat of New Entrants

Threat of New EntrantsThreat of New

EntrantsThreat of New

Entrants

Porter’s Five Forces Model of CompetitionPorter’s Five Forces

Model of Competition

Threat of New EntrantsThreat of New Entrants

Barriers to Entry

Barriers to Entry

Expected RetaliationExpected Retaliation

Government PolicyGovernment Policy

Economies of ScaleEconomies of Scale

Product DifferentiationProduct Differentiation

Capital RequirementsCapital Requirements

Switching CostsSwitching Costs

Access to Distribution ChannelsAccess to Distribution Channels

Cost Disadvantages Independent of ScaleCost Disadvantages Independent of Scale

Bargaining Power of Suppliers




Entrants



Bargaining Power of SuppliersBargaining Power of Suppliers

Suppliers exert power in the industry by:Suppliers exert power in the industry by:

* Threatening to raise* Threatening to raiseprices or to reduce qualityprices or to reduce quality

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers are likely to be powerful if:Suppliers are likely to be powerful if:

Supplier industry is dominated by a few firmsSupplier industry is dominated by a few firms

Suppliers’ products have few substitutesSuppliers’ products have few substitutes

Buyer is not an important customer to supplierBuyer is not an important customer to supplier

Suppliers’ product is an important input to Suppliers’ product is an important input to buyers’ productbuyers’ product

Suppliers’ products are differentiatedSuppliers’ products are differentiated

Suppliers’ products have high switching costsSuppliers’ products have high switching costs

Supplier poses credible threat of forward Supplier poses credible threat of forward integrationintegration

Bargaining Power of Buyers




Entrants





Bargaining Power of BuyersBargaining Power of Buyers

Buyers compete with the supplying industry by:

Buyers compete with the supplying industry by:

* Bargaining down prices* Bargaining down prices

* Forcing higher quality* Forcing higher quality

* Playing firms off of* Playing firms off ofeach

othereach

other

Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases are large Buyers are concentrated or purchases are large relative to seller’s salesrelative to seller’s sales

Purchase accounts for a significant fraction of Purchase accounts for a significant fraction of supplier’s salessupplier’s sales

Products are undifferentiatedProducts are undifferentiated

Buyers face few switching costsBuyers face few switching costs

Buyers’ industry earns low profitsBuyers’ industry earns low profits

Buyer presents a credible threat of backward Buyer presents a credible threat of backward integrationintegration

Product unimportant to qualityProduct unimportant to quality

Buyer has full informationBuyer has full information

Threat of Substitute Products




Entrants







Threat of Substitute ProductsThreat of Substitute Products

Products with similar function limit the prices firms can charge

Products with similar function limit the prices firms can charge

Keys to evaluate substitute products:Keys to evaluate substitute products:

Products with improved price/performance Products with improved price/performance tradeoffs relative to present industry products tradeoffs relative to present industry products (cost to value)(cost to value)

When competition provides additional product features and services with same or alternative products that customers can’t do without.

Example:Example:Mobile phones with camera options over Mobile phones with camera options over only telecom facilities. only telecom facilities.

Fax machines in place of overnight mail deliveryFax machines in place of overnight mail delivery

Aluminium as a substitute to steelAluminium as a substitute to steel





Entrants

Rivalry Among Competing Firms in Industry

Rivalry Among Competing Firms in Industry







Rivalry Among Existing CompetitorsRivalry Among Existing CompetitorsIntense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:

Jockeying for strategic positionJockeying for strategic position

Using price competitionUsing price competition

Staging advertising battlesStaging advertising battles

Making new product introductionsMaking new product introductions

Increasing consumer warranties or serviceIncreasing consumer warranties or service

Occurs when a firm is pressured or sees an opportunityOccurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse offPrice competition often leaves the entire industry worse offAdvertising battles may increase total industry demand, but may be costly to Advertising battles may increase total industry demand, but may be costly to smaller competitorssmaller competitors

CutthroatCutthroat competitioncompetition is more likely to occur when: is more likely to occur when:

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Numerous or equally balanced competitorsNumerous or equally balanced competitors

Slow growth industrySlow growth industry

High fixed costsHigh fixed costs

Lack of differentiation or switching costsLack of differentiation or switching costs

High storage costsHigh storage costs

Capacity added in large incrementsCapacity added in large increments

High strategic stakesHigh strategic stakes

High exit barriersHigh exit barriers

Diverse competitorsDiverse competitors

Case Study• Q.- What strategic factors must be considered in the situation where

barriers to entry are low but where suppliers have high power?• Ans. :-

– Keys.– 1. Barriers to entry

Product DifferentiationEconomics of scaleAccess to large distribution channel

-- 2. Suppliers have high power Supplier industry is dominated by a few firms Supplier industry has high switching costs

Supplier poses credible threat of forward integrationStrategy:-

Ways to overcome the possible restrictions , e.g. Reducing the switching costs, finding alternative resources.

Issues pertaining to Industry attractiveness should also be discussed

Analyzing Internal Environment• External Environment

– Analyzing the external environment enables a company to identify what it might do by identifying what opportunities exist.

• Internal Environment – Analyzing the internal environments enables a company to identify

what it can do or is capable of doing.

• The challenge is for companies to achieve a match between what the company might do and what it can do.– This match allows the company’s strategic intent and strategic

mission, as well as the subsequent implementation of value creating strategies that will result in strategic competitiveness and above-average returns.

– This make the external and internal environment analysis complementary to each other.

Focus on Internal Characteristics• Internal Analysis considers each company as a bundle of

heterogeneous resources and capabilities, which provide the company its ability to achieve and retain strategic competitiveness.

– The importance of Internal characteristics, represented by its Resources and Capabilities(which is the source of its core competencies ) highlights a shift in the priorities and prescriptions of Strategic Management Research.

• To sustain a competitive advantage, companies must be able to manage current core competencies while simultaneously developing new competencies.– The sustainability of any competitive advantage achieved will be

determined by how successfully and quickly other companies can imitate a company’s strategies.

Strategic Role of Organizational resources & Capabilities

• Financial Assets Organizational Processes• Physical Assets and routines• Human Resources Accumulated Knowledge• Intangible Assets Actual Work processes• Organizational assets

Performance Results

Competitive Advantage

Distinctive Organizational Capabilities

Organizational Resources

Organizational Capabilities

Core Competencies

Understanding Internal Environment

• Resources represent inputs into a company’s production process, such as

• raw material, capital equipments, its people, its brand, patents, trademarks etc., physical resources including its land and locations, financial resources such as borrowing capacity etc.

• By themselves or individually, resources generally will not enable a company to achieve a competitive advantage. They must be combined or integrated with other company resources to establish a capability.

• Capabilities develop over time as a result of complex interactions that take advantage of the inter-relationships between a company’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by its human resources

• Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to strategic advantage.

• Should be Valuable, rare, Costly to Imitate, Non-substitutable

THE FIRM

Goals and ValuesResources andCapabilitiesStructure and Systems

THE INDUSTRYENVIRONMENT

•Competitors•Customers•Suppliers

STRATEGYSTRATEGY

The Firm-Strategy

Interface

TheEnvironment-Strategy

Interface

Shifting the Focus of Strategy Analysis:From the External to the Internal Environment

Shifting the Focus of Strategy Analysis:From the External to the Internal Environment

WINNING TEAMS 1998-

2003

EXPENDITURES ON KEY PLAYERS, 1998-2003

Valencia (Sp) Pablo Aimar ($20.4m), Ruben Baraja ($12m)

Real Madrid (Sp)

Zinedine Zidane ($68m), Luis Figo ($55m), Ronaldo ($43m), Nicolas Anelka ($36m), David Beckham ($26m),

Deportivo La Coruna (Sp)

Sergio Gonzales ($16m), Alberto Luque ($15m)

Juventus (It) Gianluigi Buffon ($49m), Pavel Nedved ($38m), Lilian Thuram ($33m), David Trezeguet ($21m), Marco de Viao ($10m)

AC Milan (It) Rui Costa ($42m), Alessandro Nesta ($30m), Andriy Shevchenko ($24m), Andrea Pirlo ($16m), Kaka ($9m)

Parma (It) Hidetoshi Nakata ($30m), Sdrian Mutu ($9m)

Manchester United (Eng)

Rio Ferdinand ($45m), Juan Veron ($42m), Ruud van Nistelrooy ($30m), Cristiano Ronaldo ($18m), Fabien Bartez ($12m), Diego Forlan ($10m), Kleberson ($9m), Mikael Silvestre ($6m)

Arsenal (Eng) Sylvain Wiltord ($20m), Thierry Henry ($16m), Dennis Bergkamp ($12m), Nwankwo Kanu ($7m), Gilberto Silva ($7m), Patrick Vieira ($6m)

Liverpool (Eng) Emile Heskey ($16m), El Hadji Diouf ($15m), Dietmar Hamann ($12m), Chris Kerkland ($8m), Harry Kewell ($8m), Salif Diao ($8m)

HIGHEST EXPENDITURES ON NEW PLAYERS (Top 3in Spain, Italy & England)1. Barcelona2. Chelsea3. Lazio4. Manchester United5. Inter Milan6. Juventus7. AC Milan8. Arsenal9. Real Betis

Superior Resources do not necessarily mean Superior Capabilities: Transfer Fees and Team Performance in

European Soccer

Superior Resources do not necessarily mean Superior Capabilities: Transfer Fees and Team Performance in

European Soccer

Note: Spain, Italy &England only).

The Architecture of Organizational Capability

The Architecture of Organizational Capability

SKILLS &KNOWLEDGE

VALUES & NORMS

MANAGERIALSYSTEMS

TECHNICALSYSTEMS

Dorothy Leonard “Core Capabilities & Core Rigidities”

A modified view

RESOURCES•Human skills & know-how

•Technology•Culture (values, norms)

ManagementSystems

OrganizationStructure

ORGANIZATIONAL CAPABILITY

part 2-business strategy

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