Strategic management chapter 5 and 6 note for bba vii


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Strategic management chapter 5 and 6 note for bba vii

  1. 1. Unit: 5 Evaluating Company Resources and Competitive capabilitiesIdentifying company strengths and resource capabilitiesA strength is something a company is good at doing or a characteristic that gives it enhancedcompetitiveness.• A skill or important expertise: Low cost manufacturing capabilities, strong e commerceexpertise, unique advertising and promotional talents.• Valuable physical assets: Attractive location, worldwide distribution network,ownership of valuable natural resources.• Valuable organizational assets: an experienced and capable workforce, talentedemployees in key areas, motivated and energetic employees, entrepreneurship andmanagerial know how• Valuable organizational assets: Proven quality control system, key patents, computerassisted design system, well supply chain management system• Valuable intangible assets: brand name image, company reputation, buyer goodwill• Competitive capabilities: short development time in bringing new product, strongpartnerships with key suppliers, R and D capabilities• Alliances and cooperative ventures: fruitful collaborative partnership with suppliersand distribution systemDetermining the competitive value of a company resource:• Is the resource hard to copy?• How long does the resource last? The longer a resource lasts, the greater the value.• Is the resource really competitively superior to competitors?Identifying company weaknesses and resources deficienciesA weakness is something a company lacks or does poorly or a condition that puts it at adisadvantage. A company internal weaknesses can relate to• Deficiencies in competitively important skill or expertise or intellectual capital• Lack of physical organizational or intangible assets.• Missing competitive capabilities in key areas• Deficiencies in above mentioned competitivenessIdentifying a companys market opportunitiesThe market opportunities most relevant to a company are those that offer important avenues forprofitable growth those where a company has the most potential for competitive advantage andthose that match up well with the companys financial and organization resource capabilities.
  2. 2. Evaluate the opportunities based on• attractiveness• Match of with companys financial and organizational resources• Situation and circumancesIdentifying the threats to a companys future profitabilityA threats is unfavorable condition that put it disadvantages for the company Emergence of cheaper/better technologies Introduction of better products by rivals Onerous (burden) regulations Rise in interest rates Potential of a hostile takeover Unfavorable demographic shifts Adverse shifts in foreign exchange rates Political upheaval in a countryAre the companys prices and costs competitive?1. Assessing whether a firm’s costs are competitive with those of rivals is a crucial part ofcompany analysis2. Key analytical tools• Strategic cost analysis• Value chain analysis• BenchmarkingWhy rival companies have different costs?Companies do not have the same costs because of differences in1. Prices paid for raw materials, component parts, energy, and other supplierresources2. Basic technology and age of plant & equipment3. Economies of scale and experience curve effects4. Wage rates and productivity levels5. Marketing, promotion, and administration costs6. Inbound and outbound shipping costs7. Forward channel distribution costsWhat is strategic cost analysis?1. Focuses on a firm’s costs relative to its rivals2. Compares a firm’s costs activity by activity against costs of key rivals
  3. 3. a. From raw materials purchase tob. Price paid by ultimate customer3. Pinpoints which internal activities are a source of cost advantage ordisadvantageConcept of company value chain1. A company consists of all the activities and functionsit performs in trying to deliver value to its customers.2. A company’s value chain shows the linked setof activities, functions, and business processesthat it performs in the course of designing, producing,marketing, delivering, and supporting itsproduct / service and thereby creating value for its customers.3. A company’s value chain consists of two types ofactivities Primary activities (where most of the valuefor customers is created) Support activities that are undertaken toaid the individuals ands groups engaged indoing the primary activities32McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.Figure 4.2: Typical Company Value ChainDistributionAndOutboundLogisticsOperationsPurchasedSuppliesandInboundLogisticsSales andMarketingServiceProfitMarginProduct R&D, Technology, Systems DevelopmentHuman Resources ManagementGeneral AdministrationPrimary Activities and CostsSupportActivitiesand Costs
  4. 4. 41McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.Benchmarking Costs ofKey Value Chain Activities Focuses on cross-company comparisons of howcertain activities are performed and the costsassociated with these activities Purchase of materials Payment of suppliers Management of inventories Training of employees Processing of payrolls Getting new products to market Performance of quality control Filling and shipping of customer orders42McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.Objectives of Benchmarking Determine whether a company is performing particularvalue chain activities efficiently by studying the practicesand procedures used by other companies Understand the best practices in performing an activity—learn what is the “best” way to do a particular activity fromthose who have demonstrated they are “best-in-industry” or“best-in-world” Assess if company’s costs of performing particular valuechain activities are in line with competitors Learn how other firms achieve lower costs Take action to improve company’s cost competitiveness
  5. 5. Characteristics of Benchmarking Involves determining how well a firm performsparticular activities and processes against “Best in industry” and/or“Best in world” performers Represents a solid methodologyto identify options to improve Caution - Exact duplication of best practices ofother firms is not feasible due to differences inimplementation situations Best approach - Best practices of other firmsneed to be modified or adapted to a firm’s ownspecific situation44McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.What Determines Whether aCompany is Cost Competitive? A company’s cost competitiveness depends on howwell it manages its value chain relative to how wellcompetitors manage their value chains When a company’s costs are “out-of-line”, the “high-cost” activities can exist in any of three areas in theindustry value chain1. Suppliers’ activities2. The company’s own internal activities3. Forward channel activitiesActivities,Costs, &Margins ofForwardChannelAllies &StrategicPartnersInternallyPerformedActivities,Costs, &MarginsActivities,Costs, &Margins ofSuppliersBuyer/UserValueChains
  6. 6. Unit 6: Strategic OptionsTwo types of strategic options1. Generic strategy ( A core idea about how a firm can best compete in the marketplace.)2. Grand strategy (A master long term plan that provides basic direction for major actionsdirected towards achieving long-term business objectives.)Generic strategies7McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.Figure 5.1: The Five GenericCompetitive StrategiesMarketTargetType of Advantage SoughtOverall Low-CostProviderStrategyBroadDifferentiationStrategyFocusedLow-CostStrategyFocusedDifferentiationStrategyBest-CostProviderStrategyLower Cost DifferentiationBroadRange ofBuyersNarrowBuyerSegmentor NicheLow cost Provider strategy: Appealing to a broad spectrum of customer based on being theoverall low cost provider of a product or service. A low cost leaders basis for competitiveadvantage is lower overall costs than competitors. The cost leadership strategy tries to attractprice sensitive buyer and get competitive advantage.Ways to achieve cost advantage1. Controlling the cost driverEconomies of scale: Economies of scale arises whenever activities can be performed morecheaply at larger volumes. Scale of economies and diseconomies also arises in how companymanages its value chain activities of marketing, distribution etc.Learning and experience curve: Enhance operating efficiency through learning and experienceand minimize the cost. Example minimization of wastage.The cost of key resource inputs: Bargaining power to supplier, location variable costs etc.
  7. 7. Link with other activities in the company or industry value chain: when the cost of one activityis affected by how other activities are performed, costs can be managed downward by makingsure that linked activities are performed in cooperative and coordinated fashion.The percentage of capacity utilization: higher rate of percentage use, getting more costadvantage and vice versa2. Revamping value chain: Dramatic cost advantage can emerge from finding innovativeways to restructure process. The primary ways to achieve cost advantage byreconfiguring their value chain includeShifting to e business technologies: Use of the internet can enable online shopping andpurchases, online order processing and bill payment online data sharing. For example Amazon.comUsing direct to end user sales and marketing approachSimplifying product design: Unitizing computer assisted design technique, standardize parts andcomponentsReengineering of business process and layout systemDropping the "something for everyone" aproachPitfalls of Low-Cost Strategies Being overly aggressive in cutting price Low cost methods are easily imitated by rivals Becoming too fixated on reducing costsand ignoring Buyer interest in additional features Declining buyer sensitivity to price Changes in how the product is used Buyer may believe product or services are low qualityDifferentiation strategyThe essence of a differentiation strategy is to be unique in ways that are valuable to customerand can be sustained. Differentiation strategy are an attractive competitive approachwhenever buyer needs and preference are standardized product or by seller with identicalcapabilities. Incorporate differentiating features that cause buyers to prefer firm’s product orservice over brands of rivals. It also refer to find out the ways for differentiation that createvalue for buyers and that are not easily matched or cheaply copied by rivals
  8. 8. 21McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.Appeal of Differentiation Strategies A powerful competitive approach whenuniqueness can be achieved in ways that Buyers perceive as valuable and arewilling to pay for Rivals find hard to match or copy Can be incorporatedat a cost well belowthe price premiumthat buyers will payWhich hatis unique?Types of Differentiation Multiple features -- Microsoft Windows and Office Wide selection and one-stop shopping -- Superior service -- FedEx, Spare parts availability -- Caterpillar More for your money -- McDonald’s, Wal-Mart Prestige -- Rolex Quality manufacture -- Honda, Toyota Technological leadership -- 3M Corporation, Intel
  9. 9. 28McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.When Does a DifferentiationStrategy Work Best? There are many ways to differentiate aproduct that have value and pleasecustomers Buyer needs and uses are diverse Few rivals are following a similardifferentiation approach Technological change and productinnovation are fast-pacedPitfalls of Differentiation Strategies Trying to differentiate on a feature buyers do not perceive as lowering their cost orenhancing their well-being Over-differentiating such that product features exceed buyers’ needs Charging a price premium that buyers perceive is too high Failing to signal valueBest cost provider strategyBest cost provider strategy aim at giving customer more value for the money. Deliver superiorvalue by meeting or exceeding buyer expectations on product attributes and beating their priceexpectations. A company achieve best cost from an ability to incorporate attractive attributes atlower cost than rivals. It is hybrid concept of low cost and differentiation strategy. Combine astrategic emphasis on low-cost with a strategic emphasis on differentiation Make an upscale product at a lower cost Give customers more value for the moneyHow a Best-Cost Strategy differs from a Low-Cost Strategy?Aim of a low-cost strategy--Achieve lower costs than any other competitor in the industryIntent of a best-cost strategy--Make a more upscale product at lower costs than the makers ofother brands with comparable features and attributesPitfalls of a Best-Cost Provider StrategyRisk – A best-cost provider may get squeezed between strategies of firms using low-cost anddifferentiation strategiesHigh-end differentiators may be able to steal customers away with better product attributesFocus strategyThis strategy is concentrated attention on a narrow piece of the total market. The target segmentcan be defined by geographic uniqueness, by specialized requirements, special produce attributes
  10. 10. than appeal only to niche members. Choose a market niche where buyers have distinctivepreferences, special requirements, or unique needs. Develop unique capabilities to serve needs oftarget buyer segment37McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.Examples of Focus Strategies eBay Online auctions Porsche Sports cars Horizon and Comair (commuter airlines) Link major airports with small cities Jiffy Lube International Maintenance for motor vehicles Bandag Specialist in truck tire recappingWhen focus strategy is attractive? Big enough to be profitable and offers good growth potential Not crucial to success of industry leaders Costly or difficult for multi-segment competitors to meet specialized needs of nichemembers Focuser has resources and capabilities to effectively serve an attractive niche Few other rivals are specializing in same niche Focuser can defend against challengers via superior ability to serve niche membersPitfalls of a Focus Strategy Competitors find effective ways to match a focuser’s capabilities in serving niche Niche buyers’ preferences shift towards product attributes desired by majority of buyers -niche becomes part of overall market Segment becomes so attractive it becomes crowded with rivals, causing segment profitsto be splinteredGrand strategy1. Market Development
  11. 11. This grand strategy basically related with market related activities and tries to developcompetitive advantage through• Cosmetic modification of the product and service• Adding different channels of distribution• By changing the content of advertising and promotional media• By opening additional geographic market• Attractive other market segmentWhen to pursue?• When product life cycle stage reach to growth stage• When Company able to attract new customer• When favorable brand strategy2. Product developmentProduct development involves substantial modification of existing products or creation of newbut related items that can be marketed to current customers through established channel. Acompany can get competitive advantage through• Developing new product feature (color, change sound shape stronger)• Developing quality variation• Developing additional model and sizeWhen is best?• When companys initial offering response positively by the customer• When product reach to decline stage• When customer prefer modified product3. Growth and expansionThis strategy is recommend when a company in best position. In such condition company haverelatively high competitive position and high market growth rate as well. In such situation thecompany is getting rapidly markets and require substantial investment to expand.When is best?1. When the product reach growth stage of PLC2. When the product highly saleable and favorable3. When both market growth rate and competitive position is relatively high4. When company has numerous environmental opportunities and internally in strengthposition.4. Horizontal integrationThis is long term strategy of a firm is based on growth through the acquisition of one or moresimilar businesses operating at the same stage of the production marketing chain.When it pursue?• When integration provides access to new markets for the acquiring firm and eliminatedcompetitors
  12. 12. • When integrated makes organization more strong.• When integrated will be benefited in regarding with resource availability market change• When weakness of company will be fulfilled by integration• When company is able to greatly expand its operation thereby achieving grater marketshare, improving economies of scale, increase efficiency.5. Vertical integrationThis is long term strategy of a firm involves the acquisition of business that supply the firm withinputs or serve as a customer for the firms output. For example if a shirt manufacturer acquire atextile producer by purchasing its common stock and assets. It may be either backward orforward integration.When it pursue?• When a company face different problems while distribution of final product to customeror supply raw material from supplier.• When integration is beneficial to the company• Desire to decrease dependability of supply of raw material (backward integration)• When the firm can better control its cost and thereby improve the profit margin.6. Concentric diversificationWhen diversification involves related the existing business in terms of technology, markets andproducts it is called concentric diversification. In such diversification the new business will beselected on the basis of high degree of compatibility with current business.When it pursue?• When diversification increase strength and opportunities as well as decrease weaknessand risk• When synergic effects increase the efficiency and capabilities of the company• When existing technology, market and resource can be used even after diversification andget competitive advantage.• Better use of available resources.7. Conglomerate diversificationWhen diversification is made for acquiring the most profitable business area in unrelated field.The principal and often sole concern of the acquiring firm is the profit pattern.(The principal difference between two types of diversification is that concentric acquisitionsemphasize some commonality in markets, products or technology whereas conglomerateacquisition are based on profit consideration)When to pursue?• when companys available resources are mismatch for related diversification• When unrelated diversification have high growth potentiality• When current business is unsuccessful• When current business is highly success (product mix concept)8. Stability strategyWhen company continues the previous strategy the strategy adopted is called Stability strategy.
  13. 13. When to pursue?• When managers are risk avoider• Incorporation of new things does not have significant impact for companys progress.• Less volatile condition• When company is getting advantage and profit from current strategy.9 Retrenchment strategyLarge number of reasons a business can find itself with declining profit. The causes of decliningprofit are different reasons. Because of this problem company cant continue their business. Insuch condition the company faces maximum threats to continue their business and difficult tosustain. Since the company faces threats and difficulties in the market, they reduce their businessactivities. When company reduces their business activities it is called retrenchment. Such kind ofreduction is in two waysCost reduction: Decreasing the work force, leasing rather than purchasing equipment, extendinglife of machineryAssets reduction: sale of land, building, and equipmentWhen to pursue?• If the country is facing economic recessions condition• If the company is facing production inefficiency problem• A innovative breakthrough by competitors• When company continuously facing loss from long time and less chances to recoupagain.10. Turnaround strategyThis is also almost similar to retrenchment strategy. This strategy again recommend when thecompany is facing maximum threats and difficulties in existing business. The turnaroundcommonly associated with change in management position. Here we change the leader topmanagement role.When to pursue?• Bringing new manager introduces needed new perspectives and raise employee moralefor the company.• Facilitate to change drastic actions which lead to potential growth of the company.• Refer (turnaround strategy)11. Defensive strategyCurrent scenario shows that the company is facing difficulties and little chance to revive. But incoming years, there is chance to grow in future by the company. In such condition, this year thecompany try to survive and will take necessary step in coming year. This is called defensivestrategy.When to pursue?• When the company have critical internal weakness and externally major environmentalthreats• When the company currently facing threats but there is chance to grow in future.
  14. 14. 12. Liquidation strategyWhen the grand strategy is that of liquidation, t6he business is typically sold in parts. In suchcondition the strategic managers of a business are admitting failure and recognize that this actionis likely to result in great hardships to themselves and their employees.When is it best?• When firms face severe loss for long time and there is difficult to cope such loss.• When firms position lies on low industry attractiveness and low business strength in GE 9cell matrix• When firms position lies on Low market share and low market growth in BCG matrixand there is difficult survive from that position13.Joint venture/Merger/Strategic allianceJoint venture : A joint venture is a partnership in which the domestic firm and foreign firmnegotiate tie ups involving one or mere of the following: equity, transfer of technology,investment, production and marketing. Joint venture is a strategic alliance in which two or morefirms create a legally independent company to share some of their resources and capabilities todevelop a competitive advantage.Mergers: The most extensive form of participation in global markets is 100 percent ownership;which may be achieved by startup merger or acquisition.Strategic alliance: A Strategic Alliance is a formal relationship between two or more parties topursue a set of agreed upon goals or to meet a critical business need while remainingindependent organizations.When is it best?1. When the each partners to concentrate on activities that best match their capabilities.2. When the firm learning from partners & developing competences that may be morewidely exploited elsewhere3. Adequacy a suitability of the resources & competencies of an organization for it tosurvive.