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Strategic Management Bachelor of Construction Management MGT 415
Military influences in strategy • “Strategos” referred to a general in command of an army • The art of the general – By 450 B. C. it came to mean managerial skill – By 330 B. C. it referred to the skill of employing forces to overcome positions to create a system of global governance • Carl von Clausewitz “tactics…(involve) the use of armed forces in the engagement, strategy (is) the use of engagements for the object of war” 1838 On War
Academic influences in strategy • 1911 Scientific management (Taylor) – Still in place today (UPS), some consider it micromanaging • HBS requires a class in Business Policy in 1912 • Adam Smith’s “invisible hand” (the market) gives way to Alfred Sloan (GM CEO from 1923 -1946) concept of the “visible hand”—middle manager • Chester Bernard influential book “The Executive” argues that managers should pay attention to “strategic factors” • Ronald Coase’s 1937 article “why firms exist” (Nobel Prize in economics) and Joseph Schumpter’s concept of “disruptive technologies” written in 1942 bring in organizational economics • Max Weber warns against bureaucratic organizations but sees a shift toward this way of organizing
Recent influences in strategy • 1960 s (Strategy and structure; Corporate Strategy) • 1963 Harvard business conference leads to SWOT analysis • BCG founded in 1963 “strategy boutique” – Created the portfolio analysis » Stars, dogs, cash cows, question marks • 1980 s (Porter’s 5 forces) • 1990 s (Resource based view of the firm)
What is Strategic Management? • Strategic Management – The process by which the firm manages the formulation and implementation of the plan and the resulting decisions necessary to accomplish desired objectives • Roadmap to follow • Blueprint for success
What is Strategic Management? The process for moving an organization from where it is now, to where it wants to be. Today Vision for the Future
Why is strategic management important? • Gives everyone specific role for achievement • Makes a difference in performance levels • Provides systematic approach to uncertainties • Coordinates and focuses employees in meeting organization goals
What is a Strategy? • Strategy – A strategy is a declaration of intent, defining where you want to be in the long term. – Large-scale, future-oriented plan for interacting with the competitive environment to achieve objectives – It is a unique synthesis of features, design, quality, service, positioning and cost. – Company’s “game plan”. – Framework for managerial decisions
Why Strategy? • To change, an organization needs – Burning Platform – Vision – Leadership – Competitive Advantage – Survival – Strategic Management
What is Competitive Advantage? • Every firm should have one or more unique forms of competitive advantage • A firm’s competitive advantage comes from its ability to perform activities more distinctively or more effectively than its rivals. • A competitive advantage gives a firm an edge over its rivals.
Goal: Having A Unique Strategy If you have the same strategy as your competitors… Your strategy is a wash If the strategy is different but is easily copied… It provides only a temporary advantage If the strategy is different but is hard to copy It is strong and sustainable
In other words, strategy is about: • Direction; Where is the business trying to get to in the long-term • Markets & scope; Which markets should a business compete in and what kind of activities are involved in such markets? • Advantage; How can the business perform better than the competition in those markets?
In other words, strategy is about: • Resources; What resources (skills, assets, finance, relationships, technical competence, facilities) are required in order to be able to compete? • Environment; What external, environmental factors affect the businesses' ability to compete? • Stakeholders; What are the values and expectations of those who have power in and around the business?
Strategy at Different Levels of a Business Strategies exist at several levels in any organisation ranging from the overall business (or group of businesses) through to individuals working in it. Corporate Strategy is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the business. Corporate strategy is often stated explicitly in a "mission statement".
Business Unit Strategy is concerned more with how a business competes successfully in a particular market. It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc. Operational Strategy is concerned with how each part of the business is organised to deliver the corporate and business-unit level strategic direction. Operational strategy therefore focuses on issues of resources, processes, people etc.
Example: Single-Business Firms
Example: Multiple Business Firms
DEVELOPING STRATEGIES WHAT BASIS? GENERIC STRATEGIES: Cost Leadership vs. Differentiation WHAT DIRECTION? ALTERNATIVE DIRECTIONS: ‘Do Nothing’ Withdrawal Consolidation Market Penetration Product Development Market Development Diversification Related / unrelated HOW? ALTERNATIVE METHODS: Internal Development Acquisition Joint Development
Strategic Management Growth
Strategic Management Process Analyzing Current Situation Strategic Analysis Deciding on Strategies Strategy Formulation Putting Strategies in Action Strategy Implementation Evaluating & Changing Strategies Strategy Evaluation
Strategic Analysis • Starting point in the strategic management process • Precedes effective formulation and implementation of strategies • Clear goals and objectives permit effective allocation of resources • Hierarchy of goals – Vision – Mission – Strategic objectives • Managers – Scan the environment – Analyze competitors • General environment • Industry environment
Strategic Analysis (cont. ) • Frameworks for analyzing • Intellectual assets are a firm’s internal drivers of environment – Competitive advantages – Strengths – Weaknesses • Analyzing strengths can uncover potential sources of competitive advantage – Wealth creation • Networks and relationships among – – Employees Customers Suppliers Alliance partners
Strategic Analysis (cont. ) The process of Strategic Analysis can be assisted by a number of tools, including: PEST Analysis - a technique for understanding the "environment" in which a business operates Scenario Planning - a technique that builds various plausible views of possible futures for a business 5 Porter Forces Analysis - a technique for identifying the forces which affect the level of competition in an industry Market Segmentation - a technique which seeks to identify similarities and differences between groups of customers or users
Strategic Analysis (cont. ) Directional Policy Matrix - a technique which summarises the competitive strength of a businesses operations in specific markets Competitor Analysis - a wide range of techniques and analysis that seeks to summarise a businesses' overall competitive position Critical Success Factor Analysis - a technique to identify those areas in which a business must outperform the competition in order to succeed SWOT Analysis - a useful summary technique for summarising the key issues arising from an assessment of a businesses "internal" position and "external" environmental influences.
Strategic Formulation • Firm’s portfolio or • Successful firms group of businesses develop bases for – What business(es) should competitive advantage – Cost leadership – Differentiation – Focusing on narrow or industry-wide market segments • Sustainability • Industry life cycle we be in? – How can we create synergies among the businesses? • Diversification – Related – Unrelated
Strategic Formulation (cont. ) • Appropriate entry • strategies • Sustain competitive advantage in global markets • Digital technologies change the way business is conducted – Added value – Impact on performance Digital technologies can enhance – Cost leadership – Differentiation
Strategic Implementation • Informational control – Monitor and scan the environment – Respond effectively to threats and opportunities • Behavioral control • Effective corporate governance • Organizational structure and design • Organizational boundaries – Flexible – Permeable • Strategic Alliances • Develop organization – Interests of managers and that is committed to owners of the firm – Excellence – Ethical behavior
Strategic Implementation (cont. ) • Learning organization responsive to – Rapid and unpredictable change in today’s competitive environments • Corporate entrepreneurship and innovation – New opportunities – Enhance innovative capacity – Autonomous entrepreneurial behavior – Product champions • New ventures and small businesses – Major engine of economic growth – Recognize viable opportunities – Entrepreneurial leadership skills
Strategic Evaluation • Audit/Brainstorm – Internally – Externally • Alteration/Modification/Improvement – Was the strategy effective? – “Close the loop”
Model of Strategic Management Process
Advantages of Engaging in the Strategic Management Process • Provides a Sense of Purpose for a Firm – A strategic plan includes a mission statement and a vision statement. The sentiments represented in these statements provide a sense of purpose for a firm.
Advantages of Engaging in the Strategic Management Process • Aids In Decision Making – Having a strategic plan enables the leaders of a firm to ensure that day-to-day decisions fit with the long-term interests of the organization.
Advantages of Engaging in the Strategic Management Process • Brings Everyone in the Company Together – Having a strategic plan encourages everyone in a company to work together to achieve common aims.
Advantages of Engaging in the Strategic Management Process • Focus On Forward Thinking – The planning function forces managers to think ahead and consider resource needs and potential opportunities or threats that the organization may face in the future.
3 Wives & 1 Husband of Strategic Management • Why do we exist? (Mission/Vision) • Where are we? (Situational Analysis) • Where do we want to be? (Goals/Objectives) • How are we going to get there? (Who, Resources, When, Success/Failure)
Company vision Mission statements Strategic objectives Hierarchy of Goals
Coherence in Strategic Direction Company Vision Company vision • Massively inspiring/Charts a company’s future strategic course • Long-term/Defines the business makeup for 5 years (or more) Hierarchy of Goals • Driven by and evokes passion • Arouses strong sense of • Fundamental statement of the . organizational purpose organization’s Values, • Induces employee buy-in Aspiration and Goals • Galvanizes people to live . • Challenges and motivates the business workforce
Coherence in Strategic Direction Mission statements Company vision • Purpose of the company • Basis of competition and Mission statements competitive advantages • More specific than vision • Focused on the means by which the firm will compete Hierarchy of Goals • Company specific, not generic-as to give a company’s identity • Conveys – Who we are? , • A company’s mission is not to make a profit ! The real mission – What we do? , and is always-“What will we do to – Where we are now? make a profit? ” • Basis of competition and competitive advantages • More specific than vision
Coherence in Strategic Direction Strategic objectives • Operationalize the mission statement • Provide guidance on how the organization can fulfill or move toward the “higher goals” • More specific • Cover a more well-defined time frame • Resolve conflicts that arise • Yardstick for rewards and incentives Company vision Mission statements Strategic objectives Hierarchy of Goals • • • Timely Realistic Challenging Measurable Appropriate
Value of a Well-Conceived Strategic Vision and Mission • Crystallizes long-term direction • Reduces risk of rudderless decision-making • Conveys organizational purpose and identity • Keeps direction-related actions of lower-level managers on common path • Helps organization prepare for the future
The Vocabulary of Strategy
Situational Analysis There are two considerations analysis of factors that can affect the future; – External Environment (Using 5 Porter’s Forces Analysis) – Internal Environment (Using S. W. O. T Analysis) Components of the External Environmental Analysis
Analysis of the External Environments • General environment – Focused on the future • Industry environment – Focused on factors and conditions influencing a firm’s profitability within an industry • Competitor environment – Focused on predicting the dynamics of competitors’ actions, responses and intentions
General Environment • Dimensions in the broader society that influence and industry and the firms within it
Industry Environment • Set of factors directly influencing a firm and its competitive actions and competitive responses
Competitor Environment • All of the companies that the firm competes against.
Scenario of External Environment
General Environment • The Economic Segment – Inflation rates – Interest rates – Trade deficits or surpluses – Budget deficits or surpluses – Personal savings rate – Business savings rates – Gross domestic product
General Environment (cont’d) • The Sociocultural Segment – Women in the workplace – Workforce diversity – Attitudes about quality of worklife – Concerns about environment – Shifts in work and career preferences – Shifts in product and service preferences
General Environment (cont’d) • The Global Segment – Product innovations – Applications of knowledge – Focus of private and government-supported R&D expenditures – New communication technologies
General Environment (cont’d) • The Technological Segment – Product innovations – Applications of knowledge – Focus of private and government-supported R&D expenditures – New communication technologies
General Environment (cont’d) • The Political/Legal Segment – Antitrust laws – Taxation laws – Deregulation philosophies – Labor training laws – Educational philosophies and policies
General Environment (cont’d) • The Demographic Segment – Population size – Age structure – Geographic distribution – Ethnic mix – Income distribution
Industry Environment; Porter’s Five Forces Model Threat of new entrants Bargaining power of suppliers Threat of Substitute products and services Bargaining power of buyers
Industry Environment (cont’d); Threat of New Entrants: Barriers to Entry • • Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected retaliation
Industry Environment (cont’d); Barriers to Entry • Economies of Scale – Marginal improvements in efficiency that a firm experiences as it incrementally increases its size – Advantages and disadvantages of large-scale and small-scale entry
Industry Environment (cont’d); Barriers to Entry (cont’d) • Product differentiation • Capital Requirements – Unique products – Physical facilities – Customer loyalty – Inventories – Products at competitive prices – Marketing activities – Availability of capital
Industry Environment (cont’d); Barriers to Entry (cont’d) • Switching Costs – One-time costs customers incur when they buy from a different supplier – New equipment – Retraining employees – Psychic costs of ending a relationship
Industry Environment (cont’d); Barriers to Entry (cont’d) • Access to Distribution Channels – Stocking or shelf space – Price breaks – Cooperative advertising allowances
Industry Environment (cont’d); Barriers to Entry (cont’d) • Cost disadvantages independent of scale – Proprietary product technology – Favorable access to raw materials – Desirable locations • Government policy – Licensing and permit requirements – Deregulation of industries
Industry Environment (cont’d); Barriers to Entry (cont’d) • Expected retaliation – Responses by existing competitors may depend on a firm’s present stake in the industry (available business options)
Industry Environment (cont’d); Bargaining Power of Suppliers • Supplier power increases when: – Suppliers are large and few in number – Suitable substitute products are not available – Individual buyers are not large customers of suppliers and there are many of them – Suppliers’ goods are critical to buyers’ marketplace success – Suppliers’ products create high switching costs. – Suppliers pose a threat to integrate forward into buyers’ industry
Industry Environment (cont’d); Bargaining Power of Buyers • Buyer power increase when: – Buyers are large and few in number – Buyers purchase a large portion of an industry’s total output – Buyers’ purchases are a significant portion of a supplier’s annual revenues – Buyers can switch to another product without incurring high switching costs – Buyers pose threat to integrate backward into the sellers’ industry
Industry Environment (cont’d); Threat of Substitute Products • The threat of substitute products increases when: – Buyers face few switching costs – The substitute product’s price is lower – Substitute product’s quality and performance are equal to or greater than the existing product • Differentiated industry products that are valued by customers reduce this threat
Industry Environment (cont’d); Intensity of Rivalry Among Competitors • Industry rivalry increases when: – There are numerous or equally balanced competitors – Industry growth slows or declines – There are high fixed costs or high storage costs – There is a lack of differentiation opportunities or low switching costs – When the strategic stakes are high – When high exit barriers prevent competitors from leaving the industry
Industry Environment (cont’d); Interpreting Industry Analyses Low entry barriers Suppliers and buyers have strong positions Strong threats from substitute products Intense rivalry among competitors Unattractive Industry Low profit potential
Industry Environment (cont’d); Interpreting Industry Analyses High entry barriers Suppliers and buyers have weak positions Few threats from substitute products Moderate rivalry among competitors Attractive Industry High profit potential
Competitor Environment; Competitor Analysis • Competitor Intelligence – The ethical gathering of needed information and data that provides insight into: • A competitor’s direction (future objectives) • A competitor’s capabilities and intentions (current strategy) • A competitor’s beliefs about the industry (its assumptions) • A competitor’s capabilities
Competitor Environment (cont’d); Competitor Analysis Components
Internal Environment A SWOT analysis is a systematic way of looking at the internal and external factors affecting your business. S W O T represents; S trengths . W eaknesses . O pportunities . T hreats . Factors Internal to Organization Strengths Weakness Factors External to Organization Opportunities. Threats • A core competence is a well-performed internal activity that is central to a company’s competitiveness and viability • A distinctive competence is a competitively valuable activity that a company performs better than its rivals
Strengths • Strengths are generally “internal” – those things that you bring to the enterprise that can help it grow and develop successfully • Positive tangible and intangible attributes, internal to an organization. They are within the organization’s control. • Examples are: – Education – Experience – Capital – Access to advisors/support systems
Weaknesses • Like Strengths, Weaknesses are generally internal. • Factors that are within an organization’s control that detract from its ability to attain the core goal. Which areas might the organization improve? • Examples of weaknesses are: – Limited experience or education – Limited access to needed capital – Limited availability of labor, support or professional help
Opportunities • Opportunities are those things we perceive that will help our business grow. They are outside of our control, but we want to make decisions that allow us to take control of what the opportunity offers. • Identify them by their “time frames” • Most opportunities arise from our understanding of the unmet needs or wants in the marketplace. • Examples; – Unmet customer need or want for a new product or service – Opportunity to expand customer service – New market openings through product development – Changes in market demand that benefit our business
Threats • External factors, beyond an organization’s control, which could place the organization mission or operation at risk. The organization may benefit by having contingency plans to address them if they should occur. • Planning can help to reduce the impact of threats • Typical threats are: – Negative changes in market demand – Changes in economic status – Changes in customer preferences – Entry of a new competitor – Changes in regulations and laws
SWOT ANALYSIS TABLE STRENGTHS WEAKNESSES What do well? What is wrong now? • What are your advantages? • What do you do well? • What relevant resources do you have? • What do other people see as your strengths? • What could you improve? • What do you do badly? • What should you avoid? THREATS OPPORTUNITIES What can go wrong? What possibilities exist? • Where are the good opportunities facing you? • What are the interesting trends you are aware of? • Useful opportunities can come from such things as: • Changes in technology • Changes in government policy • Changes in organizational structure • Changes in business priorities? • • What obstacles do you face? What are other companies doing? Is the playing field changing? Is changing technology, trends, directions threatening your position? • Could any of your weaknesses seriously threaten your business?
Create a Plan of Action What steps can you take? Ø Capitalize on your “Strengths” Ø Overcome or minimize your “Weaknesses” Ø Take advantage of some new “Opportunities” Ø Respond to the “Threats” Strengths Opportunities S-O strategies [pursue opportunities that are fit to strengths] Threats S-T strategies [use strengths to reduce vulnerability to external threats] Weaknesses W-O strategies [overcome weaknesses to pursue opportunities] W-T strategies [establish defensive plan to prevent weaknesses susceptible to external threats]
Factors of Internal Environment (Strength & Weaknesses) Company Resources: • • • Capital (cash and liquid assets) People (employees, management) Brand / Image, Reputation Physical Resources Competencies Corporate Culture
Factors of Internal Environment (Strength & Weaknesses) Relationships with… • Suppliers / Distributors • Customers • Shareholders • Competitors • “Publics”; ØFinancial Institutions ØGovernment ØMedia ØInterest Groups ØEmployees (internal)
Factors of External Environment (Opportunities & Threats) • Economic Environment – Biz Cycles, Inflation, Unemployment • Socio-Cultural Environment – Cross-cultural aspects, Demography • Political-Legal Environment – Government regulations, Agencies • Competitive Environment – Direct or Indirect Competitors • Natural Environment – Climate, seasonal cycles, etc. • Technological Environment
Simple Rules for SWOT Analysis • Be realistic about the strengths and weaknesses of your organization or group. • Distinguish between where your organization is today, and where it could be in the future • Be specific: Avoid gray areas. • Always analyze in relation to your core mission. • Keep your SWOT short and simple. Avoid complexity and over analysis • Empower SWOT with a logical conceptual framework.
Caution! • SWOT analysis can be very subjective. Do not rely on it too much. Two people rarely comeup with the same final version of SWOT. • Use it as guide and not a prescription.
END OF TOPIC; Strategic Management