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Strategic management

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  • 1. STRATEGIC MANAGEMENT3. INDUSTRY ANALYSISIn an industry, competition depends on several factors and the success of a companydepends on how efficiently it handles these factors and survives in the face of stiffcompetition.(i) Porter’s Industry Analysis : The Five Forces ModelThe Five Forces Model is a framework which has been developed by Michael E. Porterof the Harvard Business School to assist managers in analyzing the businessenvironment. The five forces that play a crucial role in shaping a company’s future are asfollows (a) Bargaining power of customers (b) Threat posed by substitute products (c) Bargaining power of suppliers (d) Threat posed by new entrants (e) Competition among existing firms(ii) Concept of Value ChainIn value chain analysis, the organization is viewed as an orderly process of activitiesaimed at creating value. This approach is useful in understanding the building blocks ofcompetitive advantage. Value is defined as the amount buyers pay to a firm for theirproducts or services.According to Michael Porter, there are two broad categories of activities (i) Primary activities (ii) Support activitiesPrimary activities help in contributing to the manufacturing of the product or service inphysical terms. They are (a) Operation (b) Marketing and Sales (c) Inbound logistics (d) Outbound logistics (e) ServiceSecondary activities either add to the value of the product or service on their own or incombination with primary activities or other support activities. They include
  • 2. (a) Human resource management (b) General administration (c) Procurement (d) Technology developmentSTRATEGIC PROFILE OF A FIRMA strategic profile of a firm is created by understanding its strategic personality. Whenthe competitive strategy matches with its market behavior, the firm creates for itself astrategic personality.The factors are Organizational structure, Organizational culture, Leadership.FRAMEWORK FOR ANALYSING COMPETITIONThe application of Game Theory in business strategy was put forward by two authors (a)Adam. M. Bradenburger and Barry. J. Nalebuff. Game Theory makes it possible to movebeyond simple ideas of competition. And cooperation to reach a vision of competition.The five essential elements in any game are (i) Scope (ii) Participants (iii) Additional values (iv) Rules and regulations (v) Moves, tactics or strategiesConcept of ComplementarityThe process of creating value in the marketplace involves four types of players (i) Customers (ii) Suppliers (iii) Competitors (iv) Complementers
  • 3. 4. STRATEGIESA strategy is a plan of action designed to achieve a particular goal. Proper strategy isessential for the success of a firm. The three strategies that firms follow are growthstrategies, reduction strategies and turn around strategies.Two ways firms grow. (i) organic growth and (ii) inorganic growthOrganic growth means that firms grow through better penetration in the market, improvemarket share, introduce more product varieties and increase production capacity. Thiskind of growth is slow. The other growth is very fast. It is mainly by the process ofmerging or acquisition. It also explores new businesses.Growth in related areas is quite common. Growth strategy when decided by a firm can beachieved in the following ways. (a) Vertical growth (b) Horizontal growth (c) Merger and acquisitions (d) Joint ventures (e) Strategic alliances (f) ConsortiumREDUCTION STRATEGIESReduction Strategy also known as retrenchment strategy means that the firm decides todiscontinue some of the products or remove itself from some of the markets.The businesses that still have sufficient potential to make profits but not attractive enoughfor a firm can be sold off to other firms. This method is known as divestment or sell-outstrategy. Firms can also liquidate a business. That means winding up. This happens whenthere is no other alternative.The absorption of employees to other business units from closed down business units isan issue to be resolved.TURN AROUND STRATEGYLoss to company should not happen periodically. If it happens, the company should lookinto the reasons for the losses.The external and internal factors affect a company’s business. A turnaround strategyimplies a firm’s operational effectiveness.
  • 4. CORPORATE STRATEGYA company has to identify its strengths, weaknesses, opportunities and weakness(TOWS) to survive and prosper in today’s highly competitive market. An effectivecorporate strategy comprises of five elements that together make the corporate strategytriangle. The three sides of the triangle are resources, businesses and organization whichhave to be aligned with vision, goals and objectives to seek corporate advantage.TOWS matrix is a good method by which a corporate strategy can be identified. Thematrix consists of four quadrants that contain the different combinations of these features.The generic strategy that a firm follows could be classified into one of the below (i) Stability strategy (ii) Growth strategy (iii) Retrenchment (iv) A combination of the aboveBUSINESS STRATEGYA business strategy is also a competitive strategy. The various types of businessesstrategies are the following (i) Cost leadership (ii) Cost focus (iii) Differentiation strategy (iv) Differentiation focusOrganisational level Strategies(a) Corporate Level StrategiesWorld wide large corporate groups have spent considerable time, effort and money inseeking to justify their continued existence by developing world wide vision or missionstatements.The two sources of corporate advantage (a) Economies of sale (b) KnowledgeThe first generic strategy is overall cost leadership. The potential pitfalls of overall costleadership strategies (a) Too much focus on one or few value chain activities (b) All rivals share a common input or raw material (c) The strategy is imitated too easily
  • 5. (d) Lack of parity on differentiation (e) Decrease in cost advantagesRisks of focusA focus strategy is vulnerable to the following risks (a) Increasing the cost differential between broad range competitors and the focus firm might offset the differentiation achieved through focus and turn the customers towards firms that offer a broad range of products (b) Perceived or actual differences between products and services might disappear (c) Other firms might find submarkets within the target market of the focus firm and the focuser may gout of focusAn international strategy will only make sense if a company possesses such as skills andcompetencies that their indigenous counterparts in the foreign markets lack.Reasons for Cross-Border Mergers and Acquisitions (i) Growth (ii) Technology (iii) Government policy (iv) Differential labor costs and productivity (v) Source of raw materialsCORPORATE RESTRUCTURINGRestructuring can be defined as a strategy by which a company changes its business orfinancial structure.The various forms of restructuring are (i) Expansion (ii) Sell-offs (iii) Corporate Control (iv) Changes in ownership structure
  • 6. STRATEGY, IMPLEMENTATION, EVALUATION AND CONTROLStrategies can be implemented only if firms have proper organizational structures, Thecommon types of organizational structures are (a) Simple (b) Functional (c) Divisional (d) MatrixThe divisional form of organizational structure has two variations (i) Strategic Business Unit (ii) Holding company structuresIf none of the above structures work, managers have the option of matrix structure. Thebenefits of a matrix structure are that it makes it possible to take advantage of specializedpersonnel, special equipments as well as facilities. Instead of duplicating functions, theresources are shared as required.Impact of culture on two different types of organizations.Consider a MNC and a family business. MNCs emphasis on professional qualificationand rank where as the other one emphasizes on demonstrated skills, depth and quantity ofknowledge. MNCs emphasis on information gathering but in a family business, selectiveinformation is used. The former depends on comprehensive, formal and written reportingwhereas latter emphasis on the primary use of verbal reporting and remedial action.Approaches to creation of strategy supportive culture (i) To ignore corporate culture (ii) To adapt strategy implementation to suit corporate culture (iii) To change the corporate culture to suit strategic requirements (iv) To change the strategy to fit the corporate cultureOPERATIONAL STRATEGYCost reduction and maintenance of quality can be brought about by effective operationalstrategies.1. Location for manufacturing.The main factors are (i) Country (ii) Cost of technology (iii) Customization and cost effectiveness
  • 7. 2. ProductThe features are (i) Value-to-weight ratio (ii) Nature of need – universal or local3. Global SourcingCompanies are confronted with make or buy decisions. The main risk of outsourcingcomponent requirements is the resulting dependence on the supplier. The risk of suchdependency has led companies to integrate business activities. The three types ofintegration are (i) backward (ii) forward and (iii) forward integration.Global Supply Chain Management (GSCM)Supply chain management (SCM) integrates the activities of demand forecasting,procurement, manufacture, distribution and inventory management.Logistic management is primarily concerned with the effective transportation of goods.MARKETING STRATEGYStrategies for marketing must take into consideration different aspects of product,pricing, distribution and promotion. A product might be considered as a set of attributes.The influential factors are (i) Cultural differences (ii) Economic differences (iii) Technical standardsDistribution refers to the choice of the mode of delivery of products to the customer.Product specific, market specific and environment factors influence international pricing.The following factors are considered by a MNC before pricing its products for differentcountries. (i) Competitive structure (ii) Price discriminationBarriers to international communicationPush vs pull strategy A push strategy emphasizes on personal selling as part of promotion rather thanadvertising in the mass media. A pull strategy employs the mass media to communicatethe message to target customers.
  • 8. The factors that influence the firm’s choice of strategy are (i) Customer awareness (ii) Length of the channel (iii) Media availability (iv) Configuring the marketing mixHUMAN RESOURCES STRATEGYHR guides the functioning of HRM. Some factors are (i) Equity in recruitment and pay (ii) Types of staffing policy This means finding the right person for the right job. Three approaches are (i) Ethnocentric approach (ii) Polycentric approach (iii) Geocentric approachOther factor is employing expatriates.Subsidiaries autonomy in decision making often lies in the distribution of power betweenthe parent firm and the subsidiary. Three types of autonomy are (i) Limited autonomy (ii) Variable autonomy (iii) Negotiated autonomyLabor relations refer to the relationship between organized labor and management. Laborrelation management seeks to maintain a cordial relationship between labor andmanagement. The Indian Industrial Disputes Act 1947 defines an industrial dispute as adispute between employer and employer, employer and worker and other workersregarding employment, non-employment, terms of employment or conditions of work.FINANCIAL MANAGEMENT STRATEGYCurrency risk is one of the unique problems faced by internationally operating firms. In aforeign exchange market, individuals, banks and other institutions trade in currencies.The price of one currency in terms of another is called exchange rate. The sensitivity of afirm’s cash flows to changes in exchange rates is called exposure. The exposure can belong term, short term or only of an accounting nature.
  • 9. The different types of exposure (i) Economic exposure (ii) Transaction exposure (iii) Translation exposureForecasting exchange rates is an important function of a corporate manager. The modelused for forecasting exchange rates is classified as the following (a) Fundamental analysis model (b) Technical analysis modelOperational Control SystemsThey are action controls. For these systems to be effective, the following four stepsshould be taken (i) Setting standards of performance (ii) Measuring actual performance (iii) Identifying deviations from standards (iv) Initiating corrective action or adjustmentThe three types of operational control systems are (i) Budgets (revenue, capital, expenditure) (ii) schedules (iii) key success factors (high employee morale, improved product service quality,..)CRISIS MANAGEMENTCrisis management addresses certain risks and uncertainties that arise over period oftime. Three decisions that ensure crisis strategy is effective (i) Decisions concerning what can go wrong (ii) Decisions about investing in preventive measures (iii) Decisions on mechanisms for contingency managementStrategy in manufacturing concentrates on improving efficiency, quality andresponsiveness to customers.Research and development strategy aims at developing a distinctive competency ininnovation.The sales function operates with a flat structure. Flat structures are useful because thisfunction does not depend only on direct supervision.