Strategy and Firm Strategy: can be defined as the actions that managers take to attain goal of the firm. Profitability : can be measured in the rate of return that a firm makes on its invested capital (ROIC) (ROIC = net profit/total invested capital) Profit growth = percentage increase in net profits over time.
Questions/Tasks What is your Strategic Mission/Vision statement? What are the strategic challenges Pakistan’s businesses face?
Strategic Vision The strategic vision is a roadmap of a company’s future – the direction it is headed, the business position it intends to stake out and the capabilities it plans to develop.
Strategic Mission “ What is our business and what are we trying to accomplish on behalf of our customers?” Broadly outlines the organization’s activities and present business makeup.
Mission vs. Vision Vision: About companies FUTURE Mission: Tends to be on the PRESENT
CORE VALUES Core Values: Values that are independent of current industry environment and/or fads. These values should hold true despite external changes. Ideally, if company’s industry no longer values the ‘core value’, it should switch to an industry where core value is advantageous. Innovation Excellent customer service Social responsibility
CORE Purpose Core Purpose: The reason a firm exists. If the CORE VALUE is to ‘pioneer new technology’, the CORE PURPOSE would be to help pioneer new technology so that it helps customers in doing their tasks with ease.
VISIONARY GOALS Visionary Goals: Unlike Core values and purpose, these are SELECTED. Objectives the firm’s management decides to pursue. Most can fit into one of these categories: Target: quantitative or qualitative goals such as sales targets etc. Common Enemy: centered on overtaking a specific firm Role Model: to become like a firm in another industry. “Rolls Royce of airplanes”. Internal Transformation: “become Number 1 or 2 in any industry”
Strategic Management Process Strategic Quote: “ Cheshire Puss, Alice began...Would you tell me, please, which way I ought to go from here?” “ That depends a good deal on where you want to get to,” said the Cat. “ I don’t much care where –” said Alice. “ Then it doesn’t matter which way you go,” said the Cat. - Lewis Carroll, Alice in the Wonderland
What is strategic management? the art, science and craft of formulating, implementing and evaluating cross-functional decisions that will enable an organization to achieve its long-term objectives Strategic management is the highest level of managerial activity An ongoing process
Compulsions for Strategy Need to proactively shape the way a company’s business is conducted Coordinating the different actions and decisions of the components of a company and chart them toward a clear direction
Poor Actions Poor actions Poor results Poor results Passively allow strategy to drift as by-product of ongoing biz process Occasional proposals for improvement Periodically reacting to unfolding events Inconsistent strategic actions Competitive mediocrity Lackluster results Lack of cohesiveness
Five Tasks of Strategic Management Forming strategic vision of what the company’s future business makeup will be and where the organization is headed Setting Objectives Crafting a strategy to achieve the desired outcomes Implementing and executing the chosen strategy efficiently and effectively Evaluating performance and initiating corrective adjustments in vision, long-term direction, objectives, strategy, or implementation in light of actual experience, changing conditions, new ideas, and new opportunities
Strategic Management Tasks consider: Environmental scanning Strategy formulation Strategy implementation Evaluation and Control
Business Policy Vs. Strategic Management Business policy: Tends to focus on the management of the internal mechanisms of a business entity. Strategic Management: Encompasses the integrative concerns of business policy while given a pronounced significance to the external environmental and strategic factors.
Type of Business Level Strategy Cost leadership Differentiation Focused cost leadership Focused differentiation Integrated cost leadership/differentiation
Value creation Value is what determines degree of profitability The amount of value a firm creates is measured by the difference between its costs of production and the value that consumers perceive in its product.
Primary activities associated with CLS Inbound logistics Highly efficient systems to link suppliers’ products with the firm’s production processes Operations Use of economies of scale to reduce production costs Construction of efficient-scale production facilities Outbound logistics A delivery schedule that reduces costs Selection of low0cost transportation carriers Marketing and Sales A small, highly trained sales force Products priced so to generate significant sales volume Services Efficient and proper product installations in order to reduce the frequency and severity of recalls
Support activities associate with CLS Firm Infrastructure Cost-effective management information systems Relatively few managerial layers in order to reduce overhead costs Simplified planning processes to reduce planning costs Human resource management Consistent policies to reduce turnover costs Intense and effective training programs to improve worker efficiency and effectiveness. Technology development Easy-to-use manufacturing technologies Investments in technologies in order to reduce costs associated with a firm’s manufacturing processes. Procurement Systems and procedures to find the lowest cost (with acceptable quality) products to purchase as raw materials. Frequent evaluation processes to monitor supplier performance
International Strategy International strategy : is one through which the firm sells its goods or services outside its domestic market
Rationale for international diversification According to Raymond Vernon: Firm discovers an innovation Demand for product develops in foreign nation which is served by domestic production Increased demand, demands foreign investment As product become standardized, firm may move more of its operations to the region of high demand to benefit from low costs
Rationale for international diversification Another motivation to become multinational: Secure needed resources Minerals Energy Aluminum producers need bauxite Tire firms rubber Oil companies new oil fields Companies also seek access to low cost factors of production.
Four benefits firms derive from IS Increased market size Greater returns on major capital investments Greater economies of scale, scope or learning Competitive advantage through location
Market Size Companies have more markets for growth of product Saturated markets can result in low growth rates – Coca Cola Size of international firm affects decision to undertake R&D to build CA Strength of a scientific base in a country also effects R&D decision [Pakistan]
Return on Investment #1 reason: to earn above-average return on investments To earn return on large investments – factory/R&D spending- you need access to bigger markets Electronics industry As development pace for new technologies is increasing, new products become obsolete more quickly so investment needs to be recouped more quickly As competitors through reverse engineering can imitate products quickly, recouping investment via bigger markets becomes critical
Economies of Scale and learning Firm can enjoy economies of scale – particularly in its manufacturing operations If a firm can standardize its products across different markets, it can achieve optimal economies of scale Sharing resources and knowledge between units across country borders can result in exploiting core competencies. Firms can produce higher quality goods through lower costs in this manner
Location Advantages Locating facilities in other countries can result in lower costs in: Labor Energy Natural resources European Union Single currency Integration of capital markets Economies of scale
International Strategies International business level strategy Home country of operation is the most important source of CA Resources and capabilities of home country allow firm to pursue market strategies in other countries. As firm grows, importance of origin of country diminishes as the dominant factor PORTERS Determinants of National Advantage
PORTERS Determinants of National Advantage Factors of production Demand conditions Related and supporting industries Firm strategy, structure and rivalry
International corporate level strategy Multi-domestic strategy Global strategy Transnational strategy
Multi-domestic strategy MDS : an international strategy in which strategic and operating decisions are decentralized to the strategic business unit in each country so as to allow that unit to tailor products to the local market.
Global Strategy Global strategy is an international strategy through which the firm offers standardized products across country markets, with competitive strategy being dictated by the home office.
Transnational Strategy Transnational strategy seeks to achieve both global efficiency and local responsiveness
Environmental Trends Liability of foreignness Regionalization
Choice of International Entry Mode Exporting Licensing Strategic Alliances Acquisition New wholly owned subsidiary
Exporting Doesn’t require an established operation in host country Effective for small businesses making an international entry High costs of transportation and possibly tariffs Little or no control on marketing and distribution
Licensing PROS: Least costly form of international expansion Licensee takes risk of manufacturing, marketing and distribution CON: gives firm very little control over the manufacturing and marketing of its products International firm may learn the technology and use it to become a competitor after licensing agreement expires
Strategic Alliances PROS: Allow firms to share risks and resources required to enter international markets Ally knows the competitive conditions, culture, legal and social norms of the host country CONS: incompatible partners; conflict between partners
Acquisitions In recent years, 45% of all acquisitions have been done cross-border PROS: can provide quick access to new market CONS: are expensive; often requite debt financing; international acquisitions can be extremely complex;
New wholly owned subsidiary Greenfield venture : is one in which a new, wholly owned subsidiary is established PROS: maximum control, - especially good for firms with strong intangible capabilities that can be leveraged through a greenfield venture. CONS: Costs high to establish operation in new country Needs to acquire knowledge and expertise from competitors or from consultants
Strategic competitiveness outcomes After selecting international strategy and modes of entry, it’s time to IMPLEMENT
International diversification and returns International diversification and returns : is a strategy though which a firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets.
Political risk Political risk are related to instability in national governments and to war, both civil and international
Economic risk Interdependent on political risks Also include: differences and fluctuations in currencies Trade agreements
a Japanese proverb… - Vision without action is a daydream. Action without vision is a nightmare.