Unit – 4

Strategic Management
4.1 Strategic management
Strategic management is the process of formulating and implementing
strategies to accomplish longterm goals and sustain competitive advantage.
The essence of strategic management is looking ahead, understanding the
environment and the organisation, and effectively positioning the
organisation for competitive advantage in changing times. Competitive
advantage arises when an organisation acquires or develops an attribute or
combination of attributes that allows it to outperform its competitors. These
attributes can include access to natural resources, such as high‐grade ores
or inexpensive power, or access to highly trained and skilled personnel —
human resources.
Strategic management cont.
Henry Mintzberg describes organisational strategy as ‘a pattern in a stream
of decisions’. This decision based concept of strategy has two important
implications. First, strategy is not necessarily apparent from the analysis of
just one decision, because it must be viewed in the context of several
decisions and the consistency among the decisions. Second, the
organization must be aware of alternatives in all of its decisions.
4.1.1 Sustainable strategic competitiveness
Achieving and sustaining competitive advantage is a challenging task for even
the largest organisations, all of which are very aware that new technologies,
changes in the global economy or world geopolitics, and sudden shifts in
consumer demand could lead to their demise.

Sustainable competitive advantage is the hallmark of successful companies

such as Facebook, Sony and IKEA. In all these companies, technological and
design leadership has been central to the strategy of sustainable competitive
advantage and has been driven by senior management with almost crusading
zeal and passion. Sustainable competitive advantage can also be achieved
through applying technologies developed by other industries. The aim for any
organisation, however, is not just to achieve competitive advantage but to make
it sustainable in spite of competitors’ attempts to copy or duplicate a success
story.
Sustainable strategic competitiveness cont.
Organisations need to be prepared for a wide range of eventualities.
Importantly, a strategy provides the plan for allocating and using resources
with consistent strategic intent — that is, with all organisational energies
directed towards a unifying and compelling target or goal. Companies need
to be aware of technological changes that alter the rules of competition. In
addition, companies need to be aware of how customers may interact with
these technologies and where the technologies may provide access to
certain ‘slack’ resources, such as privately owned vehicles or vacant
residential accommodation. It could be said, therefore, that these
marketplace companies enable existing infrastructure to be used more
efficiently.
Sustainable strategic competitiveness cont.
Strategic management, however, is more than just being aware of how
environmental trends interact with each other to provide new opportunities
and a changed business landscape. For instance, not every company who is
aware of these trends can turn the opportunity into profit. The company must
be able to harness its own resources and in some cases change itself to turn
opportunity into profit.
4.2 Strategic management goals
A goal is a desired future state that the organization attempts to realize. The
term objective is often used interchangeably with goal but usually refers to
specific targets for which measurable results can be obtained.
Organizational objectives are the end points of an organization's mission.

The strategic goals are crucial to clarify its vision, which they concretize and
specify outcomes. They are generally defined by the owner or top
management, who is also responsible for achieving them. Strategic goals
concretize the vision and help managers to manage and motivate staff at the
organization, together with properly defined specific objectives.
Strategic management goals cont.
Sound strategy starts with having the right goal, the ultimate goal for any business should
be superior profitability. This creates value for investors in the form of above average
returns, returns that exceed what an investor could earn by investing in alternative
opportunities of equivalent risk. The nature of the competition within an organisation’s
environment largely determines whether above average returns are achievable. An
understanding of the organisation’s markets is crucial for setting strategic management
goals. Good economic analysis is therefore essential. The roots of the structural and
market analysis within strategic management lie within economics.

Organisations compete in environments that vary according to their market structures.

Where a monopoly environment exists there is only one organisation and no competition.
This creates absolute competitive advantage, delivering sustainable and probably
excessive business profits. This absolute competitive advantage may not be in the public
interest — lack of consumer choice and high prices are the likely outcomes.
Strategic management goals cont.
An oligopoly environment or oligopolistic competition is a market where a small
number of competitors feel themselves constrained more by the actions of their
rivals than by those of their customers. Organisations within an oligopoly sustain
long term competitive advantages within defined market segments. In the
absence of competition within these segments, they can reap excessive
business profits. Aircraft manufacturers, major machine tool producers, defence
manufacturers, national newspapers, natural resource extraction operations and
segments of the food manufacturing industry are in an oligopolistic environment.

An effective understanding of the principles of game theory therefore becomes a

critical skill of strategists under an oligopoly. They need to guess correctly what
a rival’s response to a price change will be; to understand when a new entrant to
the industry should be accommodated rather than driven out; and to know when
to collude with a rival, either explicitly or implicitly, rather than fighting a cut
throat action.
Strategic management goals cont.
The global economy has helped to create for many businesses today an
environment of hyper competition. This is an environment in which there are
at least several players who directly compete with one another. An example
is the fast-food industry where McDonald’s, KFC, Pizza Hut and many other
restaurant chains all compete for largely the same customers. Because the
competition is direct and intense, any competitive advantage that is realised
is temporary. Successful strategies are often copied and organisations must
be agile, in that they must continue to find new strategies that deliver new
sources of competitive advantage, even while trying to defend existing ones.
In hypercompetition, there are always some winners and losers. Business
profits can be attractive but intermittent. The customer generally gains in
this environment service innovation.
4.3 The strategic management process
Strategic management is successful when organisations, even those operating in
environments average returns. Successful strategies are crafted from insightful
understandings of the competitive environment as well as intimate knowledge of the
organisation. They are implemented with commitment and resolution.

Strategy formulation and implementation in the strategic

management process
The strategic management process cont.
The first strategic management responsibility is strategy formulation, the
process of creating strategy. This involves assessing existing strategies, the
organisation and your environment to develop new strategies and strategic
plans capable of delivering future competitive advantage.

Peter Drucker associates this process with a set of five strategic questions:

1. What is our business mission?

2. Who are our customers?

3. What do our customers consider value?

4. What have been our results?

5. What is our plan?

The strategic management process cont.
The second strategic management responsibility is strategy implementation,
the process of allocating resources and putting strategies into action. Once
strategies are created, they must be successfully acted on to achieve the
desired results. It requires decision — now. It imposes risk — now. It
requires action — now. It demands allocation of resources, and above all, of
human resources — now. It requires work — now.
4.3.1 Analysis of mission, values and objectives
The strategic management process begins with a careful assessment and clarification of
the organisational mission, values and objectives.

Mission

The mission or purpose of an organisation may be described as its reason for existence in
society. A mission should represent what the strategy or underlying business model is
trying to accomplish. ‘What are we moving to? What is our dream? What kind of a
difference do we want to make in the world?’ can be asked

A good mission statement identifies the domain in which the organisation intends to
operate — including the customers it intends to serve, the products and/or services it
intends to provide, and the location in which it intends to operate. The mission statement
should also communicate the underlying philosophy that will guide employees in these
operations. For example Consider the mission statement for Merck, one of the world’s
leading pharmaceutical companies: ‘To discover, develop and provide innovative products
and services that save and improve lives around the world’.
External stakeholders and the mission statement
Analysis of mission, values and objectives cont.
An important test of corporate purpose and mission is how well it serves the
organisation’s stakeholders. Stakeholders are individuals and groups —
customers, shareholders, suppliers, creditors, community groups and others
— who are directly affected by the organisation and its accomplishments.

In the strategic management process, the stakeholder test can be done as a

constituencies analysis. Here, the specific interests of each stakeholder are
assessed along with the organisation’s record in responding to them. Figure
above gives an example of how stakeholder interests can be reflected in a
mission statement
Analysis of mission, values and objectives cont.
Core values

Values are broad beliefs about what is or is not appropriate. Organisational

culture is defined as the predominant value system of the organisation as a
whole. Through organisational cultures, the values of managers and other
members are shaped and pointed in common directions. In strategic
management, the presence of strong core values for an organisation helps build
institutional identity. It gives character to an organisation in the eyes of its
employees and external stakeholders, and it backs up the mission statement.
Shared values also help guide the behaviour of organisation members in
meaningful and consistent ways. For example, Merck backs up its mission with
a public commitment to core values that state ‘our core values are driven by a
desire to improve human life, achieve scientific excellence, operate with the
highest standards of integrity, expand access to our products and employ a
diverse workforce that values collaboration’.
Objectives
Whereas a mission statement sets forth an official purpose for the
organisation and the core values describe appropriate standards of
behaviour for its accomplishment, operating objectives, direct activities
towards specific performance results. These objectives are shorter term
targets against which actual performance results can be measured as
indicators of progress and continuous improvement. Any and all operating
objectives should have clear means–ends links to the mission and purpose.
Any and all strategies should, in turn, offer clear and demonstrable
opportunities to accomplish operating objectives.
Objectives cont.
According to Peter Drucker, the operating objectives of a business might
include:

i. profitability — producing at a profit in business

ii. market share — gaining and holding a specific market share

iii. human talent — recruiting and maintaining a high‐quality workforce

iv. financial health — acquiring capital; earning positive returns

v. cost efficiency — using resources well to operate at low cost

vi. product quality — producing high‐quality goods or services

vii. innovation — developing new products and/or processes

viii. social responsibility — making a positive contribution to society.

4.3.2 Analysis of organisational resources and
capabilities
Second step in the strategic management process are analysis of the organisation and
analysis of its environment. They may be approached by a technique known as SWOT
analysis — the internal analysis of organisational Strengths and Weaknesses as well as
the external analysis of environmental Opportunities and Threats. A SWOT analysis
begins with a systematic evaluation of the organisation’s resources and capabilities. A
major goal is to identify core competencies in the form of special strengths that the
organisation has or where it does exceptionally well in comparison with competitors. They
are capabilities that by virtue of being rare, costly to imitate, and non substitutable
become viable sources of competitive advantage.

Core competencies may be found in special knowledge or expertise, superior

technologies, efficient manufacturing technologies or unique product distribution systems,
among many other possibilities. Organisations need more competencies that do important
things better than the competition and that are very difficult for competitors to duplicate.
 SWOT analysis of
strengths, weaknesses, opportunities and threats
Analysis of industry and environment
A SWOT analysis is not complete until opportunities and threats in the external environment are
also analysed. They can be found among macroenvironment factors such as technology,
government, social structures and population demographics, the global economy and the
natural environment. They can also include developments in the industry environment of
resource suppliers, competitors and customers. Opportunities may exist as possible new
markets or a strong economy; threats may be identified in such things as the emergence of new
competitors or technologies, resource scarcities, changing customer tastes and new
government regulations, among other possibilities.

In respect to the external environment as a whole, the more stable and predictable it is, the
more likely that a good strategy can be implemented with success for a longer period of time,
but when the environment is composed of many dynamic elements that create uncertainties,
more flexible strategies that change with time are needed. Given the nature of competitive
environments today, strategic management must be considered an ongoing process in which
strategies are formulated, implemented, revised and implemented again in a continuous
manner.

Michael Porter offers the five forces model as a way of adding sophistication to this analysis of
the environment
Porter’s model of five strategic forces affecting industry
competition
Analysis of industry and environment cont.
Porter’s framework for competitive industry analysis directs attention towards
understanding the following forces:

1. industry competitors — intensity of rivalry among firms in the industry

2. new entrants — threats of new competitors entering the market

3. suppliers — bargaining power of suppliers

4. customers — bargaining power of buyers

5. substitutes — threats of substitute products or services

Michael Porter's Five Forces
Michael Porter's Five Forces is a powerful competitive analysis tool to determine
the principal competitive influence in a market. It is a broadly used model in
business that refers to the five important factors that drive a firm's competitive
position within an industry. By thinking through how each force affects you, and
by identifying the strength and direction of each force, you can quickly assess
the strength of the position and your ability to make a sustained profit in the
industry. Thus Five Forces analysis helps the firm stay competitive by:

1. Knowing the strength of these five forces, you can develop strategies that
help their businesses be more competitive and profitable.

2. Looking at opportunities, you can to strengthen their organization's position

compared to the other players for reducing the competitive pressure as well
as generate competitive advantage.
Step-by-Step Five Forces Analysis
Porter's Five Forces Analysis is an important tool in the project planning
stage. Porter's Five Forces Analysis makes a strong assumption that there
are only five important forces that could determine the competitive power in
a business situation. Using the following three steps:

1. Identify the different factors that bring about the competitive pressures for
each of the five forces:

A. Who are the suppliers?

B. Who are the customers?

C. What are the substitute products?

D. Is it difficult to enter this industry?

E. Who are the major competitors in this industry?

Step-by-Step Five Forces Analysis cont.
2. Based on the factors identified, determine if the pressures are:

A. Strong

B. Moderate

C. Weak

3. Determine whether the strength of the five forces is favorable to earning

attractive profits in the industry. Using the Five Forces model can help answer
the following questions:

A. Is the state of competition in the industry stronger than "normal"?

B. Can companies in this industry expect to earn decent profits in light of the
competitive forces?

C. Are the competitive forces sufficiently powerful enough to undermine

industry profitability?
Components of Porter's Five Forces

1. The bargaining power of suppliers:

It represents the extent to which the suppliers can influence the prices. When
there are a lot of suppliers, buyers can easily switch to competition because no
supplier can, actually, influence the prices and exercise control in the industry.
On the contrary, when the number of suppliers is relatively small, they can push
the prices up and be powerful. Thus, supplier bargaining power is high when:

1. The market is conquered by a few big suppliers.

2. There are no alternative products available.

3. The supplier customer base is fragmented, making their bargaining power

low.

4. High switching costs from one to another supplier.

5. Possibility of supplier integration forward, to obtain higher profits and

margins.
2. The bargaining power of Customers:
The bargaining power of customers looks at customers' ability to affect the pricing and quality of
products and services. When the number of consumers of a particular product or service is low,
they have much more power to affect pricing and quality. The same holds true when a large
proportion of buyers can easily switch to a different product or service. When consumers buy
products in low quantities, the bargaining power is low. Factors affecting this force are buyer
concentration, the degree of dependency on the product, overall bargaining leverage, readily
available purchasing information, substitute products, price sensitivity, and total volume of trade.
Thus, customer bargaining power is high when:

1. Customers procure large volumes.

2. The supplying industry consists of several small operators.

3. The supplying industry is controlled with high fixed costs.

4. The product has substitutes. Switching products is easy and simple.

5. Switching products does not incur high costs.

6. Customers are price responsive. Customers could manufacture the product themselves.
3. The threat of new entrants:
when the barriers to entry into an industry are high, new businesses can hardly enter the market
due to high costs and strong competition. Highly concentrated industries, like the automobile or
the health insurance, can claim a competitive advantage because their products are not
homogeneous, and they can sustain a favorable position. On the other hand, when the barriers
to entry into an industry are low, new businesses can take advantage of the economies of scale
or key technologies. Possible barriers to entry could include:

1. Economies of scale. High initial investment costs or fixed costs

2. Cost advantage of existing players.

3. Brand loyalty.

4. Intellectual property like licenses, etc.

5. Shortage of important resources.

6. Access to raw materials is controlled by existing players.

7. Distribution means are controlled by existing players.

8. Existing players have secure customer relations. Elevated switching costs for customers.

9. Legislation and government acts.

4. The threat of substitutes:
when customers can choose between a lot of substitute products or
services, businesses are price takers, i.e. buyers determine the prices,
thereby lessening the power of businesses. On the contrary, when a
business follows a product differentiation strategy, it can determine the ability
of buyers to switch to the competition. This threat is determined by things
such as:

1. Brand dependability of customers.

2. Secure customer relationships.

3. Switching costs for customers.

4. The relative price for performance of substitutes.

5. Up-to-date trends.
5. Competitive rivalry:
in highly competitive industries, firms can exercise little or no control on the
prices of the goods and services. In contrast, when the industry is a
monopolistic competition or monopoly, businesses can fully control the
prices of goods and services. Rivalry between existing players is likely to be
high when:

1. Players are the same size.

2. Players have comparable strategies.

3. Little or no differentiation between players and their products leading to

price competition.

4. Low market growth rates.

5. Barriers for exit are high.

Porter's Five Forces Example - Footwear Company
NiceWare is a leading Footwear company that operates in the athletic apparel
industry.

Based on Porter's Five Forces model the threat of new entrants is moderate as
there are high capital costs, mostly related to advertising and promotion,
especially when a new product line is launched. On the other hand, company A
can expand in the performance apparel industry and cross-sell its products.

The bargaining power of suppliers is relatively low because the company has
many different suppliers both in the US and abroad.

The bargaining power of customers is higher in the wholesale customers as they

can switch at a low cost to the competition, thereby gaining a higher margin.
With respect to the retail customers, the bargaining power is lower as customers
are loyal to the brand.
Porter's Five Forces Example - Footwear Company
The threat of new entrants is high as the entry barriers are low - low R & D
expense, not much specialized knowledge is required in operating the
business, low production and labour cost in some cities.

The threat of substitute products is relatively low because brand loyalty is

high. Hence, the demand for the company's products is expected to continue
in the long-term.

The competitive rivalry in the industry is high as there are a lot of well-
established companies with significantly larger resources and process
patents.
The effect on Internet on Porter's 5 forces model
The entry of new competitors

Today, it’s not just traditional industry competitors the firm needs to worry about,
but new entrants from outside the industry, equipped with new digitally based
business models and value propositions. This is often tech giants and startups
that have envisioned and built a new business model from the ground up,
powered by a new platform ecosystem for digital business. They’re leveraging
the familiar social, mobile, analytics and cloud technologies, but are often adding
in personas and context, intelligent automation, the Internet of Things, and
cybersecurity to further enhance the value proposition of their platform.

Why can new entrants move in so easily? Digital business changes the rules by
lowering the traditional barriers to entry. A digitally based business model
requires far less capital and can bring large economies of scale for example.
The effect on Internet on Porter's 5 forces model
The threat of substitutes

The threat of substitutes has to do with the threat of substitute products or services. In
terms of internet based business, this can come from a purely digital substitute or a hybrid
digital/physical substitute. Taxi services, such as Uber and EasyTaxi for example, provide
a hybrid model via a digital app for consumers and taxi drivers, coupled with the physical
taxis.

Digital services wrapped around a physical product are another example and can range
from one extreme such as the industrial Internet to another such as home automation
technologies or personal fitness products. In addition, the long-term revenue stream from
the digital services may be worth far more than the one time sale of the physical product.

The threat of substitutes is high in many industries since switching costs are low and
buyer propensity to substitute is high. In the taxi services example, customers can easily
switch from traditional models to the new model simply by installing an app on their
smartphone. Propensity to switch from the traditional model is high due to consumer wait
times for taxis, lack of visibility into taxi location and so on.
The effect on Internet on Porter's 5 forces model
The bargaining power of buyers

Perhaps the strongest of the five forces impacting industry competition is the
bargaining power of buyers since the biggest driver of digital business comes
from the needs and expectations of consumers and customers themselves.

This bargaining power lays out a new set of expectations for the digital customer
experience and necessitates continual corporate innovation across business
models, processes, operations, products and services.

Customers and consumers have amassed far more bargaining power today due
to instant access to information, insights from social media including access to
reviews and feedback, low switching costs via digital channels, price sensitivity,
access to substitute products and services with greater ease of use and
convenience, as well as increased industry competitiveness as a result of the
other forces.
The effect on Internet on Porter's 5 forces model
The bargaining power of suppliers

Suppliers can accelerate or slow down the adoption of a digitally based business model
based upon how it impacts their own situation. Those pursuing digital models themselves,
such as the use of APIs to streamline their ability to form new partnerships and manage
existing ones, may help accelerate your own model.

Those who are suppliers to the traditional models, and who question or are still
determining their new role in the digital equivalent, may use their bargaining power to slow
down or dispute the validity or legality of the new model.

Good examples are the legal and business issues surfacing around the digital-sharing
economy (i.e. ride-sharing, room-sharing etc.) where suppliers and other constituents
work to ensure the business model and process innovations still adhere to established
rules, regulations, privacy, security and safety. This is a positive and needed development
since, coupled with bargaining power of buyers, it can help to keep new models “honest”
in terms of how they operate.
The effect on Internet on Porter's 5 forces model
The rivalry among the existing competitors

Finally, existing competitors are all looking at internet-based business, trying to understand the
disruptions occurring, and prepare their response. The responses can range all the way from
defensive to offensive measures, and even a first-mover attack. This rivalry among competitors
is always in play, but in recent years digital business has added fuel to the fire, just as the e-
business era did many years ago.

The rivalry is heating up because entry and exit barriers are going down due to the comparative
low-cost of internet business models, and in many cases new entrants do not even need to own
physical assets or infrastructure. In particular, the “platform” model is seeing considerable
success in the marketplace by simply connecting stakeholders and applying a set of peripheral
services to enhance the customer experience.

By doing so, platform operators are moving to the forefront of service delivery and getting closer
to the customer without even owning assets or employees working in that particular industry.
Today, any service provider, and even content provider, risks becoming hostage to the platform
operator, which, by aggregating all those peripherals and streamlining the experience of using
them, suddenly moves from the periphery to the centre.
4.4 Strategies used by organisations
The strategic management process encompasses the three levels of
strategy shown in figure. Strategies are formulated and implemented at the
organisational or corporate level, business level and functional level. All
should be integrated in means–ends fashion to accomplish objectives and
create sustainable competitive advantage.
Levels of strategy in organisations
Levels of strategy
The level of corporate strategy directs the organisation as a whole towards
sustainable competitive advantage. For a business it describes the scope of
operations by answering the following question: In what industries and markets
should we compete? The purpose of corporate strategy is to set direction and
guide resource allocations for the entire enterprise. In large, complex
organisations like General Electric (GE), corporate strategy identifies the
different areas of business in which a company intends to compete. The
organisation presently pursues business interests in aviation, home and
businesses solutions, financial (capital) services, healthcare, energy and
transportation, for example. Typical strategic decisions at the corporate level
relate to the allocation of resources for acquisitions, new business development,
divestitures and so on across the business portfolio. Increasingly, corporate
strategies for many businesses include an important role for global operations
such as international joint ventures and strategic alliances.
Business strategy
Business strategy is the strategy for a single business unit or product line. It
describes intent to compete within a specific industry or market. Large
conglomerates such as GE, are composed of many businesses, with many
differences among them in product lines and even industries. The term
strategic business unit (SBU) is often used to describe a single business or a
component that operates with a separate mission within a larger enterprise.
The selection of strategy at the business level involves answering the
question: How are we going to compete for customers in this industry and
market? Typical business strategy decisions include choices about
product/service mix, the location of facilities and new technologies.
Functional strategy
Functional strategy guides the use of organisational resources to implement
business strategy. This level of strategy focuses on activities within a specific
functional area of operations. The standard business functions of marketing,
manufacturing, human resources, and research and development illustrate
this level of strategy. The question to be answered in selecting functional
strategies becomes: How can we best use resources to implement our
business strategy? Answers to this question typically involve the choice of
progressive management and organizational practices that improve
operating efficiency, product or service quality, customer service or
innovativeness.
Growth and diversification strategies
Traditionally one of the most common and popular of the grand or master strategies
pursued by organizations at the corporate or business levels is growth. Growth strategies
pursue an increase in size and the expansion of current operations. They are popular in
part because growth is viewed as necessary for long-term survival in some industries.

One approach to growth is through concentration, where expansion is within the same
business area. Another approach to growth is through diversification, where expansion
takes place through the acquisition of, or investment in, new and sometimes different
business areas. A strategy of related diversification involves growth by acquiring new
businesses or entering business areas that are related to what the organisation already
does. This strategy seeks the advantages of growth in areas that use core competencies
and existing skills. A corporate strategy of unrelated diversification involves growth by
acquiring businesses or entering business areas that are different from what the
organisation already does. Occasionally, a company will invest in a market that is
completely unrelated to its current operations.
Growth and diversification strategies cont.
Diversification can also take the form of vertical integration, where a business seeks
added value creation by acquiring suppliers (backwards vertical integration) or distributors
(forwards vertical integration). In the car making industry, backwards vertical integration
has been common as firms purchased suppliers of key parts to ensure quality and control
over their availability. In beverages, both Coca Cola and PepsiCo have pursued forward
vertical integration by purchasing some of their major bottlers.

There is a tendency to equate growth with effectiveness, but that is not necessarily true.
Any growth strategy, whether by concentration or some form of diversification, must be
well planned and well managed to achieve the desired results. Increased size of operation
in any form adds challenge to the management process. Diversification, in particular,
brings the difficulties of complexity and the need to manage and integrate very dissimilar
operations. Research indicates that business performance may decline with too much
unrelated diversification.
Restructuring and divestiture strategies
When organisations experience performance problems, perhaps due to
unsuccessful diversification, retrenchment of some sort often takes place.
The most extreme retrenchment strategy is liquidation, when operations
cease, owing to the complete sale of assets or the declaration of bankruptcy.
Less extreme but still of potential dramatic performance impact is
restructuring. This changes the scale and/ or mix of operations in order to
gain efficiency and improve performance. The decision to restructure can be
difficult for managers to make because, at least on the surface, it seems to
be an admission of failure. But in today’s era of challenging economic
conditions and environmental uncertainty, restructuring is used frequently
and with new respect.
Restructuring and divestiture strategies cont.
Restructuring is sometimes accomplished by downsizing, which decreases the size of
operations with the intention of becoming more streamlined. The expected benefits are
reduced costs and improved operating efficiency. A common way to downsize is to cut the
size of the workforce. Research has shown that such downsizing is most successful when
the workforce is reduced in a way that allows for better focusing of resources on key
performance objectives. Retrenchment with a strategic focus is sometimes referred to as
rightsizing. This contrasts with the less well regarded approach of simply cutting staff
‘across the board’.

Restructuring by divestiture involves selling off parts of the organisation to refocus on

core competencies, cut costs and improve operating efficiency. This is a common strategy
for organisations that find they have become overdiversified and are encountering
problems managing the complexity of diverse operations. It is also a way for organisations
to take advantage of the value of internal assets by ‘spinning off’ or selling to shareholders
a component that can stand on its own as an independent business.
Cooperation in business strategies
In recent years increasing globalisation and regionalisation of markets has led to the
dramatic growth of cross border cooperation between companies. The steady reduction of
trade barriers has been accompanied by considerable economic turbulence and
uncertainty in world markets, and the spread of a high degree of trade liberalisation in
most countries of the world. A major response to this has been the growth of strategic
alliances and other forms of cooperative strategy between companies, particularly in
technology and marketing. For Porter and Fuller, the basic motivation for an alliance is
that: ‘Coalitions that arise when performing a value chain activity with a partner are
superior to any other way . . . Coalitions can be a valuable tool in many aspects of global
strategy, and the ability to exploit them will be an important source of international
advantage.’

International joint ventures are common form of international business; they constitute
one among many forms of strategic alliance. For example, in the airline industry most
companies have entered into some form of strategic marketing alliance. (Airvistara).
Cooperation in business strategies cont.
Another way to cooperate strategically is through outsourcing alliances — contracting to
purchase important services from another organisation. Many organisations are
outsourcing their payroll, recruitment, information technology and security functions to
specialized companies. This is often driven by a combination of motives — the desire to
reduce costs and to gain access to expertise that does not exist within the company.
Supplier alliances, in which preferred supplier relationships ensure a smooth and timely
flow of supplies among alliance partners, stem from cooperation in the supply chain. For
example, car manufacturers such as General Motors and Ford relied on multisourcing
during much of the 20th century, but in the 1980s began to develop supplier alliances
which were necessary for their just‐in‐time (JIT) production systems and to guarantee
improved component quality. Distribution alliances are another cooperative approach.
These involve organisations joining together to accomplish product or service sales and
distribution. For example, Telstra in Australia and Cisco Systems in the United States
have an alliance to jointly market internet services to business customers.
E‐business strategies
E‐business strategy is the strategic use of the internet to gain competitive advantage.
Popular e business strategies involve B2B (business to business) and B2C (business
to customer) applications. B2B business strategies involve the use of IT and the internet
to vertically link organisations with members of their supply chains. One of the interesting
developments in this area involves the use of online auctions as a replacement for
preferred supplier relationships and outsourcing alliances. Organisations can now go to
the internet to participate in auction bidding for supplies of many types. Whether small or
large in size they immediately have access to potential suppliers competing for their
attention from around the world.

B2C business strategies use IT and the internet to link organisations with their customers.
A common B2C strategy is e tailing; that is, the sale of goods directly to customers via the
internet. For some organisations, e tailing is all that they do; these are ‘new economy’
organisations and the business strategy is focused entirely on internet sales — examples
include Amazon.com,tailing has been added as a component in their business strategy
mix.
4.5 Strategy formulation
Michael Porter says: ‘The company without a strategy is willing to try
anything’. With a good strategy in place, the resources of the entire
organisation can be focused on the overall goal — superior profitability or
above average returns. Whether building e business strategies for the new
economy or crafting strategies for more traditional operations, it is always
important to remember this goal and the need for sustainable competitive
advantage.
4.5 Strategy formulation cont.
The major opportunities for competitive advantage are found in the following
areas:

1. cost and quality — where strategy drives an emphasis on operating

efficiency and/or product or service quality

2. knowledge and speed — where strategy drives an emphasis on

innovation and speed of delivery to market for new ideas

3. barriers to entry — where strategy drives an emphasis on creating a

market stronghold that is protected from entry by others

4. financial resources — where strategy drives an emphasis on

investments and/or loss sustainment that competitors can’t match.
4.5 Strategy formulation cont.
Importantly, any advantage gained in today’s global and information‐age
economy of intense competition must always be considered temporary, at best.
Things change too fast. Any advantage of the moment will sooner or later be
eroded as new market demands, copycat strategies and innovations by rivals
take their competitive toll over time. The challenge of achieving sustainable
competitive advantage is thus a dynamic one. Strategies must be continually
revisited, modified and changed if the organisation is to keep pace with
changing circumstances. Formulating strategy to provide overall direction for the
organisation thus becomes an on‐going leadership responsibility. Fortunately, a
number of strategic planning models or approaches are available to help
executives in the strategy formulation process. At the business level, one should
understand Porter’s generic strategies model and product lifecycle planning. At
the corporate level, it is helpful to understand portfolio planning, adaptive
strategies and incrementalism and emergent strategies.
Porters generic strategies
Michael Porter’s five forces model for industry analysis was introduced
earlier. Use of the model helps answer the question:

Is this an attractive industry for us to compete in?

Within an industry, however, the initial strategic challenge becomes

positioning your organisation and products relative to competitors. The
strategic question becomes:

How can we best compete for customers in this industry?

Porter advises managers to answer this question by using his generic

strategies framework shown in figure.
Porter’s generic strategies framework: motor
vehicle industry examples
Porters generic strategies cont.
According to Porter, business level strategic decisions are driven by two
basic factors: (1) market scope and (2) source of competitive advantage —
ask: ‘How will you compete for competitive advantage, by lower price or
product uniqueness?’. These factors combine to create the following four
generic strategies that organisations can pursue. The examples in the figure
are of competitive positions within the motor vehicle industry:

i. Differentiation - where the organisation’s resources and attention are

directed towards distinguishing its products from those of the competition
(e.g. BMW, Volvo)

ii. Cost leadership - where the organisation’s resources and attention are
directed towards minimising costs to operate more efficiently than the
competition (e.g. Hyundai, KIA)
Porters generic strategies cont.
iii. Focused differentiation - where the organisation concentrates on one
special market segment and tries to offer customers in that segment a
unique product (e.g. Land Rover, Subaru)

iv. Focused cost leadership — where the organisation concentrates on one

special market segment and tries in that segment to be the provider with
lowest costs (e.g. Suzuki)

Organisations pursuing a differentiation strategy seek competitive advantage

through uniqueness. They try to develop goods and services that are clearly
different from those made available by the competition. The objective is to
attract customers who become loyal to the organisation’s products and lose
interest in those of competitors.
Porters generic strategies cont.
This strategy requires organisational strengths in marketing, research and
development, technological leadership and creativity. It is highly dependent
for its success on continuing customer perceptions of product quality and
uniqueness.

Organisations pursuing a cost leadership strategy try to continuously

improve the operating efficiencies of production, distribution and other
organisational systems. The objective is to have lower costs than
competitors and therefore achieve higher profits. This requires tight cost and
managerial controls as well as products that are easy to manufacture and
distribute. Of course, effective operation of its type through preferential bulk
purchasing agreements with suppliers, economies of scale. It also uses one
of the youngest and least expensive labour forces.
Porters generic strategies cont.
It pays the minimum wage and keeps most staff on part time or casual
employment, thereby escaping government requirements to pay
superannuation and other statutory fulltime entitlements.

Organisations pursuing a focused differentiation strategy or a focused cost

leadership strategy concentrate attention on a special market segment with
the objective of serving its needs better than anyone else. The strategies
focus organisational resources and expertise on a particular customer group,
geographical region or product or service line. They seek to gain competitive
advantage in product differentiation or cost leadership. Importantly, focused
strategies require willingness to concentrate and the ability to use resources
to special advantage in a single area.
Product life cycle planning
Another way to consider the dynamic nature of business strategy formulation
is in terms of product life cycle. This is a series of stages a product or service
goes through in the ‘life’ of its marketability. In terms of planning, different
business strategies are needed to support products in the lifecycle stages of
new product development, introduction, growth, maturity and decline.
Products in the new product development, introduction and growth stages
lend themselves to differentiation strategies. They require investments in
market research, product development and advertising in order to establish
a product, market presence and customer base. In the maturity stage, the
emphasis shifts towards keeping customers and gaining production
efficiencies. This may involve focused and an attempt at cost leadership.
Product life cycle planning
These strategies may hold initially as the product moves into decline. But at some point,
strategic planners must seek new ways to extend product life. Understanding product life
cycles and adjusting strategy accordingly is an important business skill. Especially in
dynamic times, managers need to recognise when a product life cycle is maturing. They
should have contingency plans for dealing with potential decline, and they should be
developing alternative products with growth potential. Consider what happened at IBM, an
organisation that dominated the market for large mainframe computers for years. As
customers began to use more powerful and smaller PCs, the mainframe became less
important to their operating systems. When the mobile phone industry was starting to use
new digital technologies, Motorola continued to emphasise its successful, but older,
analogue products. Both IBM’s and Motorola’s top managers failed to properly consider
industry trends. Their companies lost momentum against very aggressive competitors
such as Hewlett‐Packard, Compaq and Dell in the computer industry and Nokia and
Ericsson and in the mobile phone industry
The product life cycle
Portfolio planning
In a single product or single business organisation the strategic context is
one industry. Corporate strategy and business strategy are the same, and
resources are allocated on that basis. When organisations move into
different industries, resulting in multiple product or service offerings, they
become internally more complex and often larger in size. This makes
resource allocation a more challenging strategic management task, since the
mix of businesses must be well managed. The strategy problem is similar to
that faced by an individual with limited money who must choose between
alternative shares, bonds and real estate in a personal investment portfolio.
In multi business situations, strategy formulation also involves portfolio
planning to allocate scarce resources among competing uses.
BCG matrix
One of the approaches to business portfolio planning is developed by the
Boston Consulting Group and known as the BCG matrix. This framework
ties strategy formulation to an analysis of business opportunities according
to industry or market growth rate and market share. This comparison results
in the following four possible business conditions, with each stars are high
market share businesses in high growth markets. They produce large profits
through substantial penetration of expanding markets. The preferred strategy
for stars is growth, share businesses in high‐owth markets. They do not
produce much profit but compete in and further resource investments in
them are recommended. Question marks are low market grrapidly growing
markets. They are the source of difficult strategic decisions.
BCG matrix cont.
The preferred strategy is growth, but the risk exists that further investments
will not result in improved market share. Only the most promising question
marks should be targeted for growth; others are restructuring or divestiture
candidates. Cash cows are high market share businesses in low growth
markets. They produce large profits and a strong cash flow. Because the
markets offer little growth opportunity, the preferred strategy is stability or
modest growth. ‘Cows’ should be ‘milked’ to generate cash that can be used
to support needed investments in stars and question marks. Dogs are low
market share businesses in low growth markets. They do not produce much
profit, and they show little potential for future improvement. The preferred
strategy for dogs is retrenchment by divestiture.
The BCG matrix approach to corporate strategy
formulation
Adaptive strategies
The Miles and Snow adaptive model of strategy formulation suggests that
organisations should pursue product/market strategies congruent with their
external environments. A well chosen strategy, in this sense, allows an
organisation to successfully adapt to environmental challenges. The prospector
strategy involves pursuing innovation and new opportunities in the face of risk
and with prospects for growth. This is best suited to a dynamic and high
potential environment. A prospector ‘leads’ an industry by using existing
technology to new advantage and creating new products to which competitors
must respond. This contrasts with a defender strategy, in which an organisation
avoids change by emphasising existing products and current market share
without seeking growth. Defence as a strategy is suited only for a stable
environment and perhaps declining industries. Defenders, as do many small
local retailers, try to maintain their operating domains with only slight changes
over time.
Adaptive strategies cont.
As a result, many suffer long term decline in the face of competition. The
analyser strategy seeks to maintain the stability of a core business while
exploring selective opportunities for innovation and change. This strategy
lies between the prospector and reactor strategies. It is a ‘follow the
leader when things look good’ approach. Many of the ‘clone’ makers in the
personal computer industry are analysers; that is, they wait to see what the
industry leaders do and how well it works out before modifying their own
operations. Organisations pursuing a reactor strategy are mainly responding
to competitive long term and coherent strategies. Some public utilities and
other organisations operating under government regulation may use this
strategy to some extent.
Incrementalism and emergent strategy
Not all strategies are clearly formulated at one point in time and then
implemented step by step. Not all strategies are created in systematic and
deliberate fashion and then implemented as dramatic changes in direction.
Instead, strategies sometimes take shape, change and develop over time as
modest adjustments to past patterns. James Brian Quinn calls this a process
of incrementalism, whereby modest and incremental changes in strategy
occur as managers learn from experience and make adjustments. This
approach has much in common with Henry Mintzberg’s and John Kotter’s
descriptions of managerial behaviour. They view managers as objectives
while still remaining flexible enough to master short term problems and
opportunities as they occur.
Incrementalism and emergent strategy cont.
Such reasoning has led Mintzberg to identify what he calls emergent
strategies. These are strategies that develop progressively over time as
‘streams’ of decisions made by managers as they learn from and respond to
work situations. There is an important element of ‘craftsmanship’ here that
Mintzberg worries may be overlooked by managers who choose and discard
strategies in rapid succession while using the formal planning models. He
also believes that incremental or emergent strategic planning allows
managers and organisations to become really good at implementing
strategies, not just formulating them.
4.6 Strategy implementation
No strategy, no matter how well formulated, can achieve longer term success if it
is not properly implemented. This includes the willingness to exercise control
and make modifications as required to meet the needs of changing conditions.
More specifically, current issues in strategy implementation include re emphasis
on excellence in all management systems and practices, the responsibilities of
corporate governance, and the importance of strategic leadership.

Management practices and systems

The rest of Management is all about strategy implementation. In order to

successfully put strategies into action the entire organisation and all its
resources must be mobilised in support of them. This, in effect, involves the
complete management process from planning and controlling through
organising and leading. No matter how well or elegantly selected, a strategy
requires supporting structures, the right technology, a good allocation of tasks
and workflow designs, and the right people to staff all aspects of operations.
4.6 Strategy implementation cont.
The strategy needs to be enthusiastically supported by leaders who are capable
of motivating everyone, building individual performance commitments, and using
teams and teamwork to best advantage. And the strategy needs to be well and
continually communicated to all relevant persons and parties. Only with such
total systems support can strategies succeed in today’s environments of change
and innovation.

Common strategic planning pitfalls that can hinder implementation include both
failures of substance and failures of process. Failures of substance reflect
inadequate attention to the major strategic planning elements — analysis of
mission and purpose, core values and corporate culture, organisational
strengths and weaknesses, and environmental opportunities and threats.
Failures of process reflect poor handling of the ways in which the various
aspects of strategic planning were accomplished. An important process failure is
the lack of participation error. This is failure to include key people in the strategic
planning effort.
4.6 Strategy implementation cont.
As a result, their lack of commitment to all important action follow through may severely
hurt strategy implementation. Process failure also occurs with too much centralisation of
planning in top management or too much delegation of planning activities to staff planners
or separate planning departments. Another process failure is the tendency to get so
bogged down in details that the planning process becomes an end in itself instead of a
means to an end. This is sometimes called ‘goal displacement’.

Recent research on strategy implementation has identified that information flow and
decision rights are two of the most important drivers in strategy execution.75 Clarification
on what decisions and actions each person in the organisation is responsible for is one of
the most important factors in strategy implementation. Also, in terms of decision rights,
once decisions are made they should only rarely be second‐guessed, as
second‐guessing tends to slow down implementation. In terms of information flow,
information about the competitive environment must flow to headquarters quickly and
information must flow freely across organizational boundaries.
Corporate governance
Organisations today are experiencing new pressures at the level of corporate
governance, especially since the spate of high profile corporate collapses in the
past decade. Corporate governance is the system of control and performance
monitoring of top management that is maintained by boards of directors and
other major stakeholder representatives. In businesses, for example, corporate
governance is enacted by boards, institutional investors in a company’s assets,
and other ownership interests. Each in its own way is a point of accountability for
top management.

The trend towards strategic alliances within and between industries raises new
issues for corporate governance. Boards of directors are formally charged with
ensuring that an organisation operates in the best interests of its owners and/or
the representative public in the case of not for profit organisations.
Corporate governance cont.
Controversies often arise over the role of inside directors, who are chosen from
the senior management of the organisation, and outside directors, who are
chosen from other organisations and positions external to the organisation. In
the past, corporate boards may have been viewed as largely endorsing or
confirming the strategic initiatives of top management.

Today they are increasingly expected to exercise control and take active roles in
ensuring that the strategic management of an enterprise is successful. If
anything, the current trend is towards greater emphasis on the responsibilities of
corporate governance. Top managers probably feel more accountable for
performance than ever before to boards of directors and other stakeholder
interest groups. Furthermore, this accountability relates not only to financial
performance but also to broader social responsibility concerns.
Strategic leadership
Strategic management is a leadership responsibility. Effective strategy implementation
and control depends on the full commitment of all managers to supporting and leading
strategic initiatives within their areas of supervisory responsibility. To successfully put
strategies into action, the entire organisation and all its resources must be mobilised in
support of them. In our dynamic and often uncertain environment, the premium is on
strategic leadership — the capability to enthuse people to successfully engage in a
process of continuous change, performance enhancement and implementation of
organisational strategies.

Porter argues that the managing director or CEO of an organisation has to be the chief
strategist, someone who provides strategic leadership.80 He describes the task in the
following way: a strategic leader has to be the guardian of trade offs. It is the leader’s job
to make sure that the organisation’s resources are allocated in ways consistent with the
strategy. This requires the discipline to sort through many competing ideas and
alternatives to stay on course and not get sidetracked.
Strategic leadership cont.
A strategic leader also needs to create a sense of urgency, not allowing the
organisation and its members to grow slow and complacent. Even when
doing well, the leader keeps the focus on getting better and being alert to
conditions that require adjustments to the strategy. A strategic leader needs
to make sure that everyone understands the strategy.

Unless strategies are understood, the daily tasks and contributions of people
lose context and purpose. Everyone might work very hard, but without
alignment to strategy the impact is dispersed rather than advancing in a
common direction to accomplish the goals. Importantly, a strategic leader
must be a teacher. It is the leader’s job to teach the strategy and make it a
‘cause’, says Porter.
Strategic leadership cont.
In order for strategy to work it must become an ever present commitment
throughout the organisation. People must understand the strategy that
makes their organisation different from others. This means that a strategic
leader must be a great communicator.

Finally, it is important to note that the challenges faced by organisations

today are so complex that it is often difficult for one individual to fulfil all
strategic leadership needs. Strategic management in large firms is
increasingly viewed as a team leadership responsibility. It takes hard work
and special circumstances to create a real team — at the top or anywhere
else in the organisation. Top management teams must work up to their full
potential in order to bring the full advantages of teamwork to strategic
leadership.