INTRODUCTION TO STRATEGIC

MANAGEMENT

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 What is Strategy ?
• Plan of action
• Formed to achieve specific goals
• Long term (against short term tactics)
• Actions & resource allocations designed to
achieve organization goals
• Objective - maximize organization strengths,
minimize competitor strengths
• Bridges the gap between ‘where we are’ and
‘where we want to be’
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 Strategic Management
 Game plan to grow business & tackle competitors
 Continuous process
 Decisions cannot be taken in isolation - any strategic
action will have reactions from affected stakeholders
(customers, suppliers)
 Analysis, decisions, and actions of a firm - to create
and sustain competitive advantage
• Analysis: of firm’s strategic goals & environment
• Decisions: what industries to compete in; how to
compete
• Actions: allocate resources; turn strategies into reality 3
 Focus of Strategic Management
How to create competitive advantage
Should a firm position itself as a low-cost producer, or
develop unique products and charge premium prices

How to sustain competitive advantage

The challenge is to create sustainable competitive
advantage since successful ideas are instantly copied by
rivals
American Airlines introduced the frequent flyer program in
the eighties to gain competitive advantage. Soon all
airlines followed suit. Thereafter this program became a
necessity and not a competitive advantage
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 Strategic Management Facts
• Competitive advantage cannot be sustained through
operational improvements alone (Michael Porter)
• Sustainable competitive advantage is possible if a
firm performs similar activities as rivals in different
ways, or performs different activities
• Leading companies develop unique systems which
are difficult to imitate and provide sustained
competitive advantage
• Operational improvements through TQM, JIT,
outsourcing, enables a firm to out-perform rivals
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 What is Strategic Planning ?
• If you fail to plan, you plan to fail
• Procedures for making decisions about the
organization’s long-term goals and strategies
• Process by which managers choose strategies
that will enable the organization to achieve
better performance
• Analyses the business and industry, and fixes
goals to meet present & future competition

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Questions to ask in Strategic Planning

1. Where will we be active?

2. How will we get there?
3. How fast will we get there?
4. How will we achieve high market-share?

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 Types of Planning

 Strategic planning
 Business planning
 Project planning
 Event planning
 Municipal planning

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Levels of Planning

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Strategic Management Process

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1. Establish vision, mission, goals
Vision:
• Long term intentions of a firm: what it can become
• Should be realistic and not impractical
Mission:
• Ways by which long term intentions are implemented
• A firm’s basic scope of operations.
Goals:
• Evolve from the firm’s mission and vision

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 2. External analysis: to identify
opportunities & threats

• Industry forces • Social issues

• Industry growth • Labor issues
• Competitor analysis • Macroeconomic
• Regulatory activities conditions
• Political activity • Technological factors

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 3. Internal Analysis: to identify
strengths & weaknesses
 Resources
• Tangible: real estate, production facilities
• Intangible: reputation, culture, patents, know-how
• Core competence: unique skill sets to tackle rivals

 Internal Resource Analysis

• Operations analysis
• Financial analysis
• Human resources assessment
• Marketing audit
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 4. SWOT Analysis
Strengths Opportunities
• Skilled management • New technology
• Positive cash flow • Underserved market
• Well-known brands niche

Weakness
• Lack of spare production Threats
capacity • Possibility of competitors
• Absence of reliable entering underserved
suppliers niche
• Technology issues facing
the organization
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 5. Implement the strategy
1. Bad implementation can fail good strategy
2. Requires good corporate governance
3. Implementing the strategy:
a. Define strategic tasks
b. Assess organization capabilities
c. Develop an implementation agenda
d. Create an implementation plan

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 6. Monitor Progress
Strategic control system
• Supports managers in evaluating organization’s progress,
take corrective actions for discrepancies
• Includes a budget to monitor and control major financial
expenditures

Balanced Score Card Model

Measures:
• Financial performance
• Quality
• Efficiency
• Innovation

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EVALUATING THE EXTERNAL ENVIRONMENT

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 Environmental Scanning

• Collecting, analyzing and distributing

information from external & internal
environments to key people within the firm
• The firm uses this tool to avoid strategic
surprise & ensure long-term health
• Generally external environment is scanned,
but good strategy includes internal factors

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 Why Scan ?

• To know the appropriate business to start

• To develop strategies to counter competition
• To track current & dynamic environment
• To make adaptive plans before changes occur

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Answers the following questions…

 Where will we be active?

 How will we get there?
 How fast will we get there?
 How will we achieve high market-share?

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 What to Scan

• New products & services

• New manufacturing processes
• New business opportunities
• Competitors
• Environmental
• Political climate
• Macro-environment: PEST
• Socio-cultural

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General Environment Analysis (9 Forces)

• Firms and their industries operate in a broad

environment, which impact their competitiveness

• The starting point of any strategic analysis is

Environmental Analysis (PEST)

• Followed by Industry Analysis (Porter's Five Forces)

• The Nine Forces together provide a holistic

perspective on a firm's competitiveness

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 Environmental Analysis (PEST)

• Political, Economic, Social, Technological

• PEST analysis addresses the broader issues that
affect a firm’s general environment, which are
usually beyond its direct influence
• Each operates over a large geographic area
(global, national, regional) and over time (past,
present, future)

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 Industry Analysis (5 Forces)
 Rivalry among current competitors: Intensity of
rivalry puts pressure on profit margins
 Bargaining power of buyers: Many or few? Can buyer
easily switch supplier?
 Bargaining power of suppliers: Many or few? Can firm
easily switch supplier?
 Entry Barrier: Regulations, economies of scale, high
investments
 Threat of substitution: Can products be easily
substituted (disruptive technology) - corn syrup vs
sugar, iPod vs CD
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 3 basic strategies for superior profits
 Cost Leadership: Achieved through lowering costs.
Strategy of Dell, Wal-Mart
 Differentiation: A product perceived as unique helps
in higher prices & profits (Mercedes, Apple)
 Focus: Satisfies the needs of a niche group
(geographic, social, demographic), helps earn above-
average returns

Not wise to be stuck in the middle - without price

leadership, differentiated product, or focus
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BUSINESS PORTFOLIO ANALYSIS

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 Business Portfolio

• Portfolio - briefcase, collection of similar items

• SBU - Strategic Business Unit. A company or
division that formulates its own strategy
• Business Portfolio - collection of SBUs that
make up a company

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 Objective of Portfolio Analysis

• Analyze SBU portfolio to decide which SBUs

should receive more/less capital
• Develop growth strategies - add new SBUs
• Decide which SBU should not be retained
• Portfolio matrices display a quick synopsis of
SBUs, rather than serving as primary tool for
resource allocation

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 Product Life Cycle

• Innovation: few competitors, high growth rate,

moderate profitability
• Growth: emergence of competitors, high
growth rate, high profitability
• Maturity: high competitive pressures, decline
in growth rate, decline in profitability
• Decline: negative growth, further decline in
profitability
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 Tools for Business Portfolio Analysis

• BCG matrix : 2 x 2 matrix which classifies an

SBU as high or low according to (a) industry
growth rate and (b) relative market share
• GE-McKinsey matrix : 3 x 3 matrix to judge an
SBU by (a) industry attractiveness and (b)
SBU’s competitive strength in that industry

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BCG Matrix

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BCG Categories of Businesses (SBU)
Cash Cows
• Core business of a firm
• High market share in low growth industry
• High cash generation; minimal investment

Stars
• High market share in high growth industry
• Cash generation; but need investments
• May become cash cow when industry matures

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BCG Categories of Businesses (contd.)
Question Marks
• Low market share in high growth industry
• Cash required to maintain market share
• Generally new products with good prospects
• With neglect - dogs; with attention - stars
Dogs
• Low market share in low growth industry
• Neither generate nor require much cash
• Cost disadvantages and should be liquidated
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 Limitations of BCG Matrix

• Four-celled approach considered too simplistic

• Market not defined clearly
• High market share involves high costs and
does not always leads to high profits
• Considers only growth rate & market share –
ignores other indicators

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GE-McKinsey Matrix

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 GE-McKinsey Matrix

• Axes are SBU Strength & Industry Attractiveness

• SBU Strength are the internal capabilities (S & W)
which are under company’s control
• Industry Attractiveness makes up the external
factors (O & T) which company cannot control
• Industry Attractiveness & SBU Strength are
calculated by multiplying the value of each
parameter with a weight
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Industry Attractiveness - Parameters
• Market growth rate
• Market size
• Demand variability
• Industry profitability
• Competitive intensity
• Global opportunities
• Macroeconomic factors (PEST)

Industry Attractiveness = Sum of [each of the

above factors X factor weights]
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 SBU Strength - Parameters
• Market share
• Growth in market share
• Brand strength
• Distribution strength
• Production capacity
• Relative cost structure & profitability

SBU Strength = Sum of [each of the above

factors X factor weights]
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 Plotting the Information
Each SBU is portrayed as a circle plotted on the matrix:
Market size = size of circle
Market share = pie chart

↖
35%
1
2

Expected future position indicated by arrow:

(a) SBU is projected to gain competitive strength
(b) industry is projected to become more attractive

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GE-McKinsey Matrix

Grow Grow Hold

Grow Hold Harvest

Hold Harvest Harvest

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 Strategic Implications
• The three cells at the top left are the most
attractive in which to operate, and need
investment for growth
• The three diagonal cells are medium attractive,
and the management within this category
should be cautious
• The three cells at the bottom right are the least
attractive, and the management should harvest
or divest unless the strengths can be improved
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Limitations of GE-McKinsey Matrix

• Weights assigned to factors are arbitrary

• Complicated & takes long to complete
• Business environment ignored
• Core competencies of firm not considered
• Interactions among SBUs ignored

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 BCG vs McKinsey

• 2x2 matrix vs 3x3 matrix

• Simple vs Complicated
• GE McKinsey a guide for resource allocation;
does not deal with cash flows like BCG
• BCG uses market growth rate as proxy for
industry attractiveness, and market share as
proxy for SBU strength

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