Strategic Management-1.pptx

Strategic management unit01

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Introduction • Strategic Management is exciting and challenging. It makes fundamental decisions about the future direction of a firm – its purpose, its resources and how it interacts with the environment in which it operates. • Every aspect of the organization plays a role in strategy – its people, its finances, its production methods, and its customers and so on. NMBA041 (STRATEGIC MANAGEMENT)

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What Is Strategic Management? • Strategic Management can be described as the identification of the purpose of the organization and the plans and actions to achieve that purpose. • It is that set of managerial decisions and actions that determine the long term performance of a business enterprise. • Strategic management involves those management processes in organizations through which future impact of change is determined and current decisions are taken to reach a desired future. • In short, strategic management is about envisioning the future and realizing it. NMBA041 (STRATEGIC MANAGEMENT)

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DEFINITIONS

• “ Strategic management is concerned with the determination of the base long term goals & objective of an enterprise and the adoption of courses of action & allocation of resource s necessary for carrying out these goals.” Alfred Chandler. • “strategic management is a process of formulating implementing & evaluating cross functional decisions that enable an org. to achieve its objective.” Pearce & Robinson. • “ It includes understanding the strategic position of an organization making strategic choices for the future & turning strategy into action.”Johnson & Sholes NMBA041 (STRATEGIC MANAGEMENT)

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Strategic management v/s operational management s. Strategic management no

Operational management

1

Concern with decision taken in uncertain &complex conditions

Related to routine / day to day problems

2

Involves top management

Middle& lower level

3

Issues/problems related to long term or they are unfamiliar

Problems requires immediate attention & are familiar.

4

Have wide implication

Have implication at functional / work level

5

Eg. Joint ventures , mergers, diversification.

Production planning, sales planning.

6

Related to long duration

Related to short duration

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CHARACTERISTICS OF STRTEGIC MANAGEMENT 1. 2. 3.

Concerned with long term direction. Recognizes change in environment It is oriented towards future i.e. it tries to anticipate events rather simply react as they occur. 4. Takes into account several components of the external environ. & their impact. 5. It is concerned with the a scope of an org. i.e. whether org should concentrate on one activity / number of activities. 6. It greatly affects org. success/ failure. 7. It requires investment of substantial financial resources. 8. It identifies opportunities in the business environ. &adopting resources to take advantage of those opportunities. 9. Values & expectations of stakeholders of organization also influenced the strategic decisions of an org. 10.It aims at achieving some advantage for the org. over others. 11. It involves both intuition &strategic analysis.

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Nature of Strategic Management • The following are the fundamental characteristics of strategic management. Readers may note that some of these characteristics may overlap with the characteristics of “strategic decisions” and “strategic approach” as these is all related concepts. • Long-term Direction • Recognizes Change • Oriented Towards the Future • External Emphasis • Concerned with Scope of the Organization NMBA041 (STRATEGIC MANAGEMENT)

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Importance of Strategic Management • It helps the firm to be more proactive than reactive in shaping its own future. • It provides the roadmap for the firm. It helps the firm utilize its resources in the best possible manner. • It allows the firm to anticipate change and be prepared to manage it. • It helps the firm to respond to environmental changes in a better way. • It minimizes the chances of mistakes and unpleasant surprises. • It provides clear objectives and direction for employees NMBA041 (STRATEGIC MANAGEMENT)

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Business Policy • A Business policy course seeks to integrate the knowledge gained in various functional area courses like finance, marketing, operations, human Resources etc. so as to develop a generalist approach in management studies.  Business policy as a field of study was first introduced at Harvard Business School in 1911.

 The course was designed with the main objective of imparting general management competence among

students. NMBA041 (STRATEGIC MANAGEMENT)

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Definition Of Business Policy • •

According to Newman and Logan: “Business policy represents the best thinking of the company management as to how the Objectives may be achieved in the prevailing economic and social conditions.”

 According to RE Thomas, •

“Business policy, basically, deals with decisions regarding the future of an ongoing enterprise. Such policy decisions are taken at the top level after carefully evaluating the organizational strengths and weaknesses in relation to its environment”.

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Objectives Of Business Policy • The Business policy course has three important purposes: 1. Integrates the knowledge and methods learnt in functional

courses such as production, finance, marketing, HR etc.

2. Develops analytical skills and decision-making Capabilities of students through extensive case studies, research reports, industry specific studies and data. 3. Promotes positive attitudes, ethical values and healthy ways of thinking taking a holistic view of the internal as well as external stakeholders of an organization. NMBA041 (STRATEGIC MANAGEMENT)

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Importance of Business policy 1. It provides an integrated view of management based on knowledge and experience. 2. The complexities of business and the constraints of managing business in a competitive environment are brought home with real-life bearing. 3. It provides a broader perspective of learning because it cuts across the narrow boundaries of functional management. 4. The process of policy formulation can be understood with a clear perspective of environment. NMBA041 (STRATEGIC MANAGEMENT)

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Business Policy And Strategic Management • Business policy and Strategic Management is an integrated discipline which is concerned with the policy and strategic issues of an organization. Focus of Business Policy

1. 2.

Traditional name of Strategic management Focus is on integrating knowledge gained in various functional areas

3. 4.

Focus of Strategic Management

1.

2. Focus is on achieving a “fit” between organizational capabilities and environmental opportunities 3.

Primarily looks inward

Emphasis is on integrated approach to solve organization wide problems

The current name of Business Policy

4.

Primarily looks outward

Emphasis is on management of strategy to achieve competitive advantage

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Business: Vision, Mission And Objectives The first task in the process of strategic management is to formulate the organization’s vision and mission statements. These statements define the organizational purpose of a firm. Together with objectives, they form a “hierarchy of goals.” Hierarchy of Goals Vision Mission

Goals Objectives Plans NMBA041 (STRATEGIC MANAGEMENT)

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Vision  Vision can be defined as “a mental image of a possible and desirable future state of the organization” (Bennis and Nanus). It is “a clear descriptive image of what a company wants to become in future”.  “The critical point is that a vision presents a view of a realistic, credible, attractive future for the organization, a condition that is better in some important ways than what now exists.”  Vision, therefore, not only serves as a backdrop for the development of the purpose and strategy of a firm, but also motivates the firm’s employees to achieve it.

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Definitions of Vision • Johnson: Vision is “clear mental picture of a future goal created jointly by a group for the benefit of other people, which is capable of inspiring and motivating those whose support is necessary for its achievement”. • Kirkpatrick et al : Vision is “an ideal that represents or reflects the shared values to which the organization should aspire”. • Thornberry: Vision is “a picture or view of the future. Something not yet real, but imagined. What the organization could and should look like. Part analytical and part emotional”. • Shoemaker: Vision is “the shared understanding of what the firm should be and how it must change”. 16 NMBA041 (STRATEGIC MANAGEMENT)

Characteristics of a Good Vision • Clear & concise • Both stable& flexible • Provides guidance in making decision i.e. focused • Should have powerful motivational effect. • It should distinguish company from others. • Should be realistic & achievable • Should convey the future image of company. NMBA041 (STRATEGIC MANAGEMENT)

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Advantages of Vision  Good vision fosters long-term thinking.  It creates a common identity and a shared sense of purpose.  It is inspiring.  It represents a discontinuity, a step function and a jump ahead so that the company knows what it is to be.  It promotes risk-taking and experimentation.  A good vision is competitive, original and unique. It makes sense in the market place.  A good vision represents integrity. It is truly genuine and can be used for the benefit of people. NMBA041 (STRATEGIC MANAGEMENT)

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Vision Failure

Vision Failure A vision may fail when it is:

 Too specific (fails to contain a degree of uncertainty)  Too vague/not definite (fails to act as a landmark)  Too inadequate (only partially addresses the problem)  Too unrealistic (perceived as unachievable)

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Examples of vision • American Express; Although American Express is known for offering credit card services to individuals around the world, their vision statement says that they want their company to be "the world's most respected service brand." Through their vision statement, American Express does not focus on being the best credit card service provider. Instead, they focus on being respected as a "service brand. • The McGraw-Hill Companies; Although McGraw-Hill is known for publishing text books for students .McGraw-Hill's vision includes "economic growth and job creation" and "creating a smarter, better world." They focus on how their products and services can help individuals and the world.

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Examples of vision-continue... • Reebok; Reebok is known for making athletic products for men, women and children. Through their vision statement, Rebook also wants to provide inspiration to all of their customers by saying that "we all have the potential to do great things" and "to help consumers, athletes and artists, partners and employees fulfill their true potential and reach heights they may have thought un-reachable.“ • Cooper Tire and Rubber Company;Cooper Tire and Rubber Company is known for making tires including cars, trucks and motorcycles. Their vision statement says "creating superior value, for our customers, employees, partners and shareholders." Cooper Tire and Rubber Company wants to be known for "superior value" instead of only for its products. NMBA041 (STRATEGIC MANAGEMENT)

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Mission • “A mission statement is an permanent statement of purpose”. A clear mission statement is essential for effectively establishing objectives and formulating strategies. • Defining Mission • Thompson defines mission as “The essential purpose of the organization, concerning particularly why it is in existence, the nature of the business it is in, and the customers it seeks to serve and satisfy”.

• Hunger and Wheelen simply call the mission as the “purpose or reason for the organization’s existence”.

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Importance of Mission Statement 1. It helps to ensure unanimity of purpose within the organization. 2. It provides a basis or standard for allocating organizational resources. 3. It establishes a general tone or organizational climate.

4. It serves as a focal point for individuals to identify with the organization’s purpose and direction. 5. It facilitates the translation of objectives into tasks assigned to responsible people within the organization.

6. It specifies organizational purpose and then helps to translate this purpose into objectives in such a way that cost, time and performance parameters can be assessed and controlled. NMBA041 (STRATEGIC MANAGEMENT)

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Examples of Mission Statements Reliance Industries: “To become a major player in the global chemicals business and simultaneously grow in other growth industries like infrastructure”.  ONGC: “To stimulate, continue and accelerate efforts to develop and maximize the contribution of the energy sector to the economy of the country”.  Hindustan Lever: “Our purpose is to meet everyday needs of people everywhere – to anticipate the aspirations of our consumers and customers, and to respond creatively and competitively with branded products and services which raise the quality of life”.  McDonald: “To offer the customer fast food prepared in the same high quality worldwide, tasty and reasonably priced, delivered in a consistent low key décor and friendly manner”. 

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Distinction Between Vision and Mission Vision

Mission

1.

A mental image of a possible and desirable future state of the organization.

1.

Permanent statement of philosophy,

2.

A dream.

2.

The way to achieve that dream.

3.

Broad.

3.

More specific than vision

4.

Answers the question “what we want to become?”

4.

Answers the question “what is our business”.

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Objectives •

Objectives are the results or outcomes an organization wants to achieve in pursuing its basic mission. The basic purpose of setting objectives is to convert the strategic vision and mission into specific performance targets.

• Characteristics of Objectives  Specific        

Quantifiable Measurable Clear Consistent Reasonable Challenging Contain a deadline for achievement Communicated, throughout the organization

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Role of Objectives  They provide legitimacy  They state direction  They aid in evaluation  They create synergy

 They reveal priorities  They focus coordination  They provide basis for resource allocation

 They act as benchmarks for monitoring progress  They provide motivation

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Goals And Objectives Goals

Objectives

1. General

Specific

2. Qualitative

Quantitative, measurable

3. Broad organization–wide target

Narrow targets set by operating divisions

4. Long term results

Immediate, short term results

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Corporate Strategy



Strategy formulation in a multi-business enterprise is different from strategy formulation in a single-business enterprise.

 In a single-business enterprise, the key question is how to compete successfully in the chosen market.  So, there is only one-level strategy known as business-level Strategy.  But in a multi-business enterprise, which is involved in several businesses, there is a need to have strategies at two levels – a corporate level strategy for the company as a whole and a business level strategy for each of the separate businesses of the company. NMBA041 (STRATEGIC MANAGEMENT)

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Types Of Corporate Strategies • • • •

Stability Strategy Growth / Expansion Strategies Defensive :Strategies/Retrenchment Combination strategy

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Strategic Decision Making

Organizational

Decision making

strategic

Tactical

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Operational

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Continue…………………………….

Strategic decision

• Deals with long run future of org. • Concern with imp. Function of top level executive. • Wider in scope.

Tactical decision

• Deals with specific plans & how strategy is to be implement. • Concern with primarily a middle level manager functions. • Narrower in scope.

Operational decision

• Focus on day to day , real time activities of an org. • Concern with frontline manager function.

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Strategic

Management

Model

The strategic management process can be better understood by using a model as shown in the figure.

Analyse External Environment

Develop vision and ` mission

Establish long-term objectives

Generate, Analyze and Select Strategies

Implement Strategies

Evaluate and Control Strategies

Analyse Internal Environment

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Impact of globalization on Strategic Management • the globalization of business has become so rapid that a new field called "Global Strategic Management" has now emerged. This new field is a blend of strategic management and international business that develops worldwide strategies for global corporations. Whereas most studies in this field focus on ordinary business conditions, the revolutionary events of the past few years make it clear that the present is not ordinary. Such epoch-shattering events as the collapse of communism, the unification of Europe, the information revolution, the arrival of an environmental ethic, and other remarkable new developments signal that a new era is emerging in global affairs. NMBA041 (STRATEGIC MANAGEMENT)

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Continue……. • The following trends represent the principal driving forces that are now moving the world in new directions. They could be called "supertrends." • Trend 1: A Stable Population of 10-14 Billion • Trend 2: Industrial Output Will Increase by a Factor of 5-10 • Trend 3: Information technology (IT) is a revolutionary force that will continue to overthrow governments, restructure corporations, and unify the world. • Trend 4: The High-Tech Revolution • Trend 5: Global Integration • Trend 6: Diversity and Complexity • Trend 7: A Universal Standard of Freedom NMBA041 (STRATEGIC MANAGEMENT)

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UNIT-II Impact of Internet & E-Commerce •

E-Business is the use of Internet technologies to improve and transform key business processes. The critical aim of companies making a foray into e-business is to offer what the customer wants without the expenses incurred in traditional businesses.

 Perhaps the greatest technological influence on strategic management in the 21st century has been the widespread use of the Internet.  Internet is the ‘network of networks’ that allows exchange of data, content, voice and video, as well as linking with the suppliers through the Extranet, and various internal divisions through the Intranet. Internet strategy aims at managing business through relationship, information and knowledge – based coordination.  The rise of the Internet has greatly influenced the strategic management process. NMBA041 (STRATEGIC MANAGEMENT)

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• What Is E-business? •

E-business means conducting business electronically. Simply speaking, business entails buying and selling of goods and services. E-business includes buying and selling on the internet. In a broader sense, business involves the following key components:



ensuring the supply and availability of stock (supply chain management)



ensuring transport and delivery support (logistics)



ensuring responsiveness to the customer demand (customer relationship management); and



ensuring payment (transactions)

•

Electronic Business (e-business) strategy addresses how best these various components of business can be managed ‘electronically’.

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• Origin of e-Business  The origin of e-Business can be traced to electronic funds transfer, which allowed banks and organizations to transfer funds among one another, without the need for physical paperwork and money activity to take place.  Internet has become a strategic priority.  E-business strategy requires a business model that is responsive to the macro environment, and that supports internal resources and collaborative external alliances.

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Forms Of Electronic Commerce •

Electronic commerce activities can be classified into four basic categories by identifying businesses and consumers as initiators and recipients of the offer. Businesses are commonly involved in more than one of these segments simultaneously and/or involved in both electronic (i.e., “clicks”) and traditional (i.e., “bricks”) forms of commerce, often referred to as “clicks and bricks.” It is widely believed that successful retail firms of the future will likely be the ones that adopt this combination approach.

Who is the Buyer?

Who is the Seller?

B2B Business to Business

B2C Business to Consumer

C2B Consumer to Business

C2C Consumer to Consumer

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How Does The Internet Add Value? • The Internet has changed the way business is conducted. By conducting business online and using digital technologies to streamline operations, the internet is helping companies to add value. Four value-adding activities that have been enhanced by Internet are:  Search Activities  Evaluation Activities  Problem–solving Activities  Transaction Activities • The above four activities are supported by three different types of content that Internet businesses use. They are: i. Customer feedback ii. Expertise iii. Entertainment programming

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Cooperative Environment & Internet

• Internet links several value players: customers, suppliers, business partners, employees and managers. Such a linkage facilitates several value adding activities:  e-commerce for customer relationship activities

 e-sourcing for supply chain management  e-ventures for collaboration with other partnership  e-working for a whole new work culture  e-learning for knowledge management

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How Does Internet Affect Competition? • In terms of a firm’s competitive environment, most of the changes brought about by the Internet can be understood in the context of Porter’s five forces model of industry analysis.  The threat of new entrants  The bargaining power of buyers  The bargaining power of suppliers

 The Threat of Substitutes  The Intensity of competitive rivalry NMBA041 (STRATEGIC MANAGEMENT)

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Effect of Internet on Competitive Strategies

• The way companies formulate strategies and implement them is also changing because of the impact of the Internet on many industries. • Overall Cost Leadership • An overall low-cost leadership strategy involves managing costs in every activity of a firm’s value chain and offering no-frills products. Internet and digital technologies now provide even more opportunities to manage costs and achieve greater efficiencies. • Some of the benefits are:  Online bidding and order processing  Online purchase orders  Collaborative design efforts using Internet  Online testing and evaluation in the hiring process  Online training NMBA041 (STRATEGIC MANAGEMENT)

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•

Differentiation

•

A differentiation strategy involves providing unique, high-quality products and services and charging premium prices.

•

Some of the techniques that firms are using to achieve successful differentiation are:



Internet-based knowledge management systems that link all parts of the organization help shorten response times and accelerating organizational learning.



Personalized online access helps customers to process orders directly on the supplier’s website.



Quick online response and rapid feedback to customers.



Online access to real-time sales and service information.



Automated procurement and payment system.

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• Focus • A focus strategy involves targeting a narrow market segment with customized products and or specialized services. • Internet provides the following avenues to the focusers:

 Chat rooms, discussion boards etc.,  Niche portals (A niche portal is a specialized portal (website that offers a broad array of resources and services))

 Virtual organizing and online “officing”  Procurement technologies that match buyers and sellers

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• Internet-based companies now dominate business in many industries. A few examples are given below:  Automobiles: e-Bay has become the largest US used-car dealer.  Travel: Internet-based travel service firms have become the largest travel agencies. (e.g. Expedia).  Computers: Dell computers dominate the business and competitors try to imitate its Internet operations.  Financial Services: Internet-based companies (e.g., Lending Tree) are already dominating the business.  Health Care: Web MD and similar firms are gaining popularity rapidly.  Retailing: Amazon.com, e-Bay etc. have become the top retailers in US. Even Wal-Mart’s online tactics are crushing traditional retailers such as Kmart.  Education: Phoenix and other universities are growing dramatically. Some organizations have moved training sessions to the Internet.  Music: Apple computer sells music downloads. NMBA041 (STRATEGIC MANAGEMENT)

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Role of Strategic Management in Marketing, Finance, HR and global competitiveness

• One way fit of HRM with strategy HR systems should be in alignment of strategy • Kesler (1995) considers this alignment as the partnering role of HR where HR is highly integrated with business processes.

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Two way fit of HRM with Strategy • • HRM systems not only align to the business strategy, but also contribute in the strategy formulation • • Contribute as understanding the linkages between structure, culture, HRM and the strategy.

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SHRM is involved in every step of STRATEGY Strategy formulation is influenced by– 1. presence/absence of HR representation business 2. knowledge of the HR representative, 3. HR knowledge of the HR representative, 4. inter-personal relationship of the HR representative with the top management team NMBA041 (STRATEGIC MANAGEMENT)

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Strategy implementation and HR

1. 2. 3. 4. 5.

• flexibility of HRM systems, • competency of HR personnel, • availability of resources, • execution efficiency, • support of line managers

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Strategy Evaluation and HRM • • Performance appraisal

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Strategic management and finance • Strategic financial management is concerned with the role of strategic management in finance function. • Strategic financial management helps a firm in attracting resources , maximization of shareholders wealth, taking appropriate decisions, to make the firm survive and grow in future. NMBA041 (STRATEGIC MANAGEMENT)

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1. Continuous search for investment opportunities 2. • Selection of most profitable opportunities 3. • Determination for optimal mix of internal and external funds to finance these opportunities . 4. A financial control system to govern acquisition and disposition of funds 5. • Analysis of financial results as a guide to future goals NMBA041 (STRATEGIC MANAGEMENT)

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Strategy and Marketing • Concerned with facing the competition in long run • Making a corporate image • Formation of marketing strategies

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Strategy and GLOBAL MARKETS • The different strategies that companies use to compete in the global marketplace and discuss the advantages and disadvantages of each. • Now we will examine the different approaches that companies employ to enter foreign markets-including exporting, licensing, setting up a joint venture, and setting up a wholly owned subsidiary. NMBA041 (STRATEGIC MANAGEMENT)

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• • • •

UNIQUE COMPETENCIES LOCATION ADVANTAGES EXPERIENCE CURVE COMPULSIONS FOR COST REDUCTION AND RESPONSIVENESS • RESPONSIVENESS TO LOCAL NEEDS

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STRATEGIC CHOICE • Companies use four basic strategies to enter and compete in the international environment. • Each of these strategies has its advantages and disadvantages. 1. International Strategy 2. Multidomestic Strategy 3. Global Strategy 4. Transnational Strategy NMBA041 (STRATEGIC MANAGEMENT)

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APPROACHES TO GLOBAL ENTRY • There are five main modes of entering a foreign market: 1. exporting, 2. licensing, 3. franchising, 4. entering into a joint venture with a host country company, 5. setting up a wholly owned subsidiary in the host country NMBA041 (STRATEGIC MANAGEMENT)

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Environmental scanning • Environmental scanning is the process of gathering information about events and their relationships within an organization's internal and external environments. The basic purpose of environmental scanning is to help management determine the future direction of the organization. The most widely accepted method for categorizing different forms of scanning divides into the following three types: • Irregular scanning systems: These consist largely of ad hoc environmental studies. • Regular Scanning systems: These systems revolve around a regular review of the environment or significant environmental components. This review is often made annually. • Continuous scanning systems: These systems constantly monitor components of the organizational environment. NMBA041 (STRATEGIC MANAGEMENT)

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• Environmental Scanning • The process by which organizations monitors their environment to identify opportunities and threats affecting their business, is known as environmental scanning. • The following factors to be considered for environmental scanning: 1. Events: Important and specific occurrences that taking place in a certain sector. 2. Trends: The general tendencies or courses of action along which these events take place. 3. Issues: The current concerns that arise in response to events and trends. 4. Expectations: The demands made by interested groups in the light of their concern for issues.

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Environmental Analysis 

Environmental analysis or scanning is the process of monitoring the events and evaluating trends in the external environment, to identify both present and future opportunities and threats that may influence the firm’s ability to reach its goals.



managers need to analyze a variety of different components of the external environment, & identify “Key Players” within that area, and be very sure of both threats and opportunities within the environment.



The main purpose of environmental scanning is therefore to find out the correct “fit” between the firm and its environment, so that managers can formulate strategies to take advantage of the opportunities and avoid or reduce the impact of threats.

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Opportunities and Threats • Opportunities: An opportunity is a major favourable situation in a firm’s environment. For example, favourable changes in competition, technological change, a favourable law etc………..

• Threats: A threat is a major unfavourable situation in a firm’s environment that creates a risk or cause damage to the organization. For example, the entrance of new competitors, slow market growth, unfavourable technological changes etc. ……………………

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Importance Of Environmental Analysis  Environmental analysis helps managers: 1. To detect key trends and events in the environment. 2. To develop forecasts and scenarios. 3. To identify opportunities and threats. 4. To get information on the competitive environment. 5. To set appropriate objectives. 6. To avoid strategic surprise and to ensure long-term health. 7. To analyze and evaluate strategic alternatives. 8. To formulate winning strategies responsive to competitive forces. 9. To develop sustainable competitive advantage. 10. To work out networks and cooperative ventures NMBA041 (STRATEGIC MANAGEMENT)

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Environmental Forecasting  Environmental forecasting involves the development of projections about the direction, scope, speed and intensity of environmental change or it is one tool for analyzing trends to avoid strategic mistakes by firms

Environmental scanning

Environmental monitoring

Forecasts

Environmental intelligence NMBA041 (STRATEGIC MANAGEMENT)

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Continue…………………………….

 Environmental scanning…..  Environmental monitoring : tracks the trends sequence of events , difference b/w scanning &monitoring is scanning makes aware of the trends & monitoring enables firms to evaluate how trends are changing…………….  Environmental intelligence: also call competitive intelligence help to provide critical information on competitor’s move

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Features of Environmental Analysis • It must includes a total view of the environment rather then partial view of trends. • It should be a continuous process. • It should like to explore uncertain future i.e. to find out alternative outcomes, probabilities etc……………

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Components of External Environment Mega Environment / macro environment/PESTEL factors Relevant Environment/operating environment

Micro Environment /industry environment.

internal Environment

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Continue………………………….

•

Political, gov, legal factors: form of govt, political stability, party, attitude towards foreign companies, laws on various economic matters • Economic factors: GDP, interest rate , unemployment rate, inflation, money supply etc…. • Socio –cultural factors : • Demographic graphic factors; size, growth rate, age group, sex composition , family size etc………… • Technological factors: adoption to new technique ,new products, new ways of managing & connecting etc……can create competitive advantage or not adjusting to modern technology can bring downfall Eg : of new technology are: bio- technology, Robotics, Genetic engineering etc…… • Ecological factors: • Global factors: economic conditions in host country, cultural factors, laws of host country, political stability material &manpower in the host country.

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Operating environment • Also know as task environment/ relevant environment of a firm • Includes those factors which affects firms success in getting required resources.

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Operating Environment &The MICRO ENVIRONMENT

Markets: Marketing

Types and

Intermediaries

Competition

Demand

Suppliers

E-commerce

THE MICROENVIRONMENT

Skill Level of Industrial Financial

Regulatory

Relations

Institutions

Provisions

Climate

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Workforce

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1.

2. 3. 4. 5. 6. 7.

Suppliers: imp to have good relation with suppliers and firm should find is suppliers price reasonable, what discount is supplier giving, shipping charges, dependence of supplier etc…… Customers: to know & fulfill consumer need is main concern of org. , to evaluated market trend, make profile of past& present customers Competitors: skills, facilities, managerial talent, image etc….. Creditors: what creditor thinks, terms of credit Labour market: presence of skilled labour, image of company Distributors& retailers: they ensure firm product reaches to end user Legal environment; at local state national level ……………..

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industry analysis • The basic purpose of industry analysis is to assess the strengths and weaknesses of a firm relative to its competitors in the industry. It tries to highlight the structural realities of particular industry and the extent of competition within that industry. Through industry analysis, an organization can find whether the chosen field is attractive or not and assess its own position within the industry. NMBA041 (STRATEGIC MANAGEMENT)

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• importance of industry analysis can thus be summarized as follows. 1. Industry – related factors have a more direct impact on the firm than the general environment. 2. An industry’s dominant economic characteristics are important because of their implication for crafting strategy. 3. Industry analysis reveals industry attractiveness and its prospects for growth. 4. It helps the firm to identify such aspects as: i. ii. iii. iv. v.

5. 6. 7.

Current size of the industry Product offerings Relative volumes Performance of the industry in recent years Forces that determine competition in the industry.

It focuses attention on the firm’s competitors. It helps to determine key success factors. A thorough understanding of the industry provides a basis for thinking about appropriate strategies that are open to the firm. NMBA041 (STRATEGIC MANAGEMENT)

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Framework For Industry Analysis

• Industry analysis covers two important components:

1. Industry environment 2. Competitive environment

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Industry environment Industry features Industry prospects for future

Industry boundaries

Industry Analysis

Industry attractiveness

Industry practices

Industry structure

Industry environment Industry performance

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Competitive Analysis • Competitive analysis basically addresses two questions: 1. Which firms are our competitors ? 2. What factors shape competition in industry ? Competition means rivalry between two or more parties to achieve a similar goal. In business, competition generally refers to the fight for market share which serves the same basic customer needs.

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Analytical Models The analytical techniques that managers generally use to assess their competitive environment are: •

Porter’s Five-forces Model The Five Forces model developed by Michnal E. Porter has been the most commonly used analytical tool for examining competitive environment. According to this model, the intensity of competition in an industry depends on five basic forces. These five forces are:

1.

Threat of new entrants

2.

Intensity of rivalry among industry competitors

3.

Bargaining power of buyers

4.

Bargaining power of suppliers

5.

Threat of substitute products and services. NMBA041 (STRATEGIC MANAGEMENT)

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Forces that Shape Competition • 1- The Threat of New Entrants • • • i. ii. iii. iv. v. vi. vii.

The first of Porter’s Five Forces model is the threat of new entrants. New entrants bring new capacity and often substantial resources to an industry with a desire to gain market share and established companies always discourage new entry Barriers to entry Entry barriers depend on the advantages that existing companies have relative to new entrants. There are seven major sources: Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of size Government policy

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Continue……………….

•

• •

• • •

•

Economics of scale: these are cost advantage related with large scale production , cost of product per unit decreases as the production increases, this discourage new entry. Product differentiation; loyalty of customer towards established company. Capital requirement; large scale investment can act barrier for new entry mainly when capital is needed for some unrecoverable purpose Switching cost; are one time cost that consumer has to bear to switch from one product to another product higher the switching cost more the barriers. Access to the distribution channel; new entry need to secure distribution channel such as retailer/whole sale Cost disadvantages independent of size i.e. some existing companies may have some adv other than economics of scale like; easy access to raw material, govt subsidies . Favorable geog, conditions, estab. Brand identities etc. Govt policy; it can allow or put restrictions /disallow like in Indian eco. Before LPG

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Expected Retaliation • New entrants are likely to fear expected retaliation if:  Existing companies have previously responded vigorously to new entrants  Existing companies possess substantial resources to fight back  Existing companies seem likely to cut prices to protect their market share  Industry growth is slow, so newcomers can gain volume only by taking the market share from existing companies.

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2- Intensity of Rivalry among Competitors • Rivalry means the competitive struggle between companies in an industry to gain market share from each other. • The intensity of rivalry is greatest under the following conditions:

i.

Numerous competitors or equally powerful competitors

ii. Slow industry growth iii. High fixed but low marginal costs iv. Lack of differentiation or switching costs v. High exit barriers NMBA041 (STRATEGIC MANAGEMENT)

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Continue…………………….

•

• •

• •

Numerous competitors or equally powerful competitors; if competitors are more or powerful intensity of rivalry will be more any action by one will be match by other. Slow industry growth; it turns competition into fight High fixed but low marginal costs; it creates intense pressure for competitors to cut prices below average cost. Low switching cost; this encourage competitors to cut price to win customers like airline industry. High exit barriers; can be economical, strategic, emotional etc…. If it is high firm will remain locked even if indus. Not earning profit.

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Common exit barriers 1.

Investment in specialized assets like plant and machinery are of little or no value, and cannot be put to alternative use. So, they have to be continued.

2.

High costs of exit such as retrenchment benefits, etc. that have to be paid to the redundant workers when a company ceases to operate.

3.

Emotional attachment to an industry keep owners or employees unwilling to exit from an industry for sentimental reasons.

4.

Economic dependence on the industry when the firm depends on a single industry for revenue and profit.

5.

Government and social pressures discourage exit of industries out of concern for job loss.

6.

Strategic interrelationships between business units and others prevent exit because of shared facilities, image………………………

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3- Bargaining power of buyers •

Bargaining power of buyers refers to the ability of buyers to bring down prices charged by firms in the industry or increase the costs of the firm by demanding better product quality and service.

•

According to Porter, buyers are most powerful under the following conditions:

i.

ii. iii.

There are few buyers

The products are standard or undifferentiated, he can find alternative source of supply The buyer faces low switching costs

iv.

The buyer earns low profits, if he is under pressure to reduce its purchasing costs then he bargains more

v.

The quality of buyer’s products if it is little affected by industry product buyers are more price sensitive. NMBA041 (STRATEGIC MANAGEMENT)

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4- Bargaining power of suppliers • Suppliers are companies that supply raw materials, components, equipment, machinery and associated products. • A supplier’s bargaining power will be high under the following conditions: i. ii.

Few suppliers Product is differentiated, unique it removes firms option to play one supplier against others

iii. Dependence of supplier group on the firm, when does not depend heavily on industry for revenues or supply material to other industries. iv. Importance of the product of the firm v.

Lack of substitutes NMBA041 (STRATEGIC MANAGEMENT)

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5- Threat of Substitute Products •

The fifth of Porter’s Five Forces model is the threat of substitute products. A substitute performs the same or a similar function as an industry’s product. Video conferences are a substitute for travel. Plastic is a substitute for aluminum. E-mail is a substitute for a mail. All firms within an industry compete with industries producing substitute products.  The existence of close substitutes is a strong competitive threat because this limits the price that companies in one industry can charge for their product. If the price of coffee rises too much relative to that of tea or soft drink, coffee drinkers may switch to those substitutes.  The more attractive is the price/performance ratio of substitute products, the more likely they affect an industry’s profits

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Porter’s Five Forces Model Potential entrants Threat of new entrants Bargaining power of suppliers

Industry competitors

Suppliers

Bargaining power of buyers Buyers

Rivalry among existing firms Threat of substitute products or services

Substitutes

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• Industry Life Cycle Analysis • A useful tool for analyzing competitive forces is the industry life cycle model.

• Like firms, industries develop and evolve over time. Not only the group of competitors within a firm’s industry might change constantly, but also the nature and structure of the industry can also change as it matures and its markets become better defined. An industry’s developmental stage influences the nature of competition and profitability among competitors (Hofer, 1975). NMBA041 (STRATEGIC MANAGEMENT)

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• In theory, each industry passes through four distinct phases of an industry life cycle. (See Exhibit ) 1. Embryonic 2. Growth/Shakeout 3. Mature 4. Decline • The ‘shakeout’ stage is generally considered a part of growth stage.

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Environmental Threat and Opportunity Profile (ETOP) • An environmental threat and opportunity profile is a description of the structure of external factors. • Multiple Reasons for an ETOP 1. It helps the organization to identify opportunities and threats 2. Consolidates and strengthens an organization’s position 3. Provides strategists information on which sectors have a favorable impact on the organization 4. The organization gains knowledge of its standing with respect to its environment 5. Helps formulate strategies.

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Steps in an ETOP 1. Identify major Environmental factors such as: economic, political, social, technological, competitive, geographical, etc. 2. Environmental factors are then sub-divided into subsectors of each factor. 3. These factors are then analyzed to determine major weaknesses and strengths in each of the subsectors. 4. The impact of each factor is then accessed as being either favorable, unfavorable, or neutral. NMBA041 (STRATEGIC MANAGEMENT)

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ORGANIZATIONAL APPRAISAL Organizational Capability Profile (OCP) - Weakness(-5), Normal(0), Strength(5) Financial Capability Profile (a) Sources of funds (b) Usage of funds (c) Management of funds Marketing Capability Profile (a) Product related (b) Price related (c) Promotion related (d) Integrative & Systematic

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ORGANIZATIONAL APPRAISAL Operations Capability Factor (a) Production system (b) Operation & Control system (c) R&D system Personnel Capability Factor (a) Personnel system (b) Organization & employee characteristics (c) Industrial Relations General Management Capability (a) General Management Systems (b) External Relations (c) Organization climate NMBA041 (STRATEGIC MANAGEMENT)

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EXAMPLES OF ORGANIZATIONAL CAPABILITY PROFILE Financial Capability Bajaj - Cash Management LIC - Centralized payment, decentralized collection Reliance - high investor confidence Escorts - Amicable relation with Fis Marketing Capability Hindustan Lever - Distribution Channel IDBI/ICICI Bank - Wide variety of products Tata - Company / Product Image

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EXAMPLES OF ORGANIZATIONAL CAPABILITY PROFILE Operations Capability Lakshmi machine works - absorb imported technology Balmer & Lawrie - R&D - New specialty chemicals Personnel Capability Apollo tyres - Industrial relations problem

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EXAMPLES OF ORGANIZATIONAL CAPABILITY PROFILE General management capability Malayalam Manaroma - largest selling newspaper Unchallenged leadership - Unified, stable Best edited & most professionally produced

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Strategic advantage profile • Strategic advantage profile is known as SAP. It shows strength and weakness of an organization. Preparation of SAP is very similar process to the ETOP. There are generally five functional areas in most of the organizations. These areas are Ø Production or Operation Ø Finance or Accounting Ø Marketing or Distribution Ø Human Resource & Corporate Planning Ø Research & Development These functional areas are listed to identify their relative strength and weakness in SAP. Each functional area is very broad having many components inside. NMBA041 (STRATEGIC MANAGEMENT)

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• Examples: The Strategist should look to see if the firm is stronger in these factors than its competitors. When a firm is strong in the market, it has a strategic advantage in launching new products or services and increasing market share of present products and services.

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Strategic Advantage Factors: Marketing and Distribution 1. Competitive structure and market share: To what extent has the firm established a strong mark share in the total market or its key sub markets? 2. Efficient and effective market research system 3. The product&service mix: quality of products and services. 4. Product-service line: completeness of product-service line and product-service mix; phase of life-cycle the main products and services are in. 6. Patent protection (or equivalent legal protection for services) 7. Positive feelings about the firm and its products and services on the part of the ultimate consumer. 8. Efficient and effective packaging of products (or the equivalent for services).

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9. Effective pricing strategy for products and services. 10. Efficient and effective sales force: close ties with key customers. How vulnerable are we in terms of concentrating on sales to a few customers? 11. Effective advertising: Has it established the company's product or brand image to develop loyal customers? 12. Efficient and effective marketing promotion activities other than advertising. 13. Efficient and effective service after purchase. 14. Efficient and effective channels of distribution and geographic coverage, including internal efforts

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R & D (Research and Development) and Engineering function can be a strategic advantage for two reasons: 1. It can lead to new or improved products for marketing 2. It can lead to the development of improved manufacturing or material processes to gain cost advantages through efficiency. Strategic Advantage Factors: R&D and Engineering 1. Basic research capabilities within the firm 2. Development capability for product engineering 3. Excellence in product design 4. Excellence in process design and improvements 5. Superior packaging developments being created 6. Improvements in the use of old or new materials 7. Ability to meet design goals and customer requirements 8. Well-equipped laboratories and testing facilities

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9.Trained and experienced technicians and scientists 10.Work environment suited to creativity & innovation 11. Managers who can explain goals to researchers and research results to higher managers 12. Ability of unit to perform effective technological forecasting.

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DIFFERENT APPROACHES TO DEVELOP AN COMPETITIVE ADVANTAGE: 1.The first approach is to compete based on existing strengths. This approach is called KFS, abbreviated from Key Success Factors. The firm can gain strategic advantage if it focuses resources on one crucial point. 2.The second approach is still based on existing strengths but avoids head-on competition. The firm must look at its own strengths which are different or superior to that of the competition and exploit this relative superiority to the fullest. NMBA041 (STRATEGIC MANAGEMENT)

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For example, the strategist either • (a) makes use of the technology, sales network, and so on, of those of its products which are not directly competing with the products of competitors or • (b) makes use of other differences in the composition of assets. This avoids head-on competition.

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3.The third approach is used for example to compete directly with a competitor in a well-established, stagnant industry. Here an unconventional approach may be needed to up set the key factors for success that the competitor has used to build an advantage. The starting point is to challenge accepted assumptions about the way business is done and gain a novel advantage by creating new success factors 4.Finally, a competitive advantage may be obtained by means of innovations which open new markets or result in new products. This approach avoids head-on competition but requires the firm to find new and creative strengths. Innovation often involves market segmentation and finding new ways of satisfying the customer's utility function. 5.In each of these approaches the principal point is to avoid doing the same thing as the competition on the same battleground. So the analyst needs to decide which of these approaches might be pursued to develop a sustainable distinctive competence. NMBA041 (STRATEGIC MANAGEMENT)

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Corporate Analysis • It describes the strength & weakness of a company. • It covers all aspects of company including finances, profit margins ,organizational structure & growth opportunities. • The main purpose behind this analysis is that investor & industry analysts can review company’s position • In short can use to plan both short & long term investments in company. • Company conducts its on a usual basis, may be annually or twice a year depending upon company’s structure.

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The Value Chain Analysis  The concept of value chain analysis was introduced by Michael Porter in 1985 in his book “Competitive Advantage”.  This concept is derived from an established accounting practice that calculates the value added to a product by individual stages in a manufacturing or service process.  Porter has applied this idea to the activities of an organization as a whole, arguing that it is necessary to examine activities separately in order to identify sources of competitive advantage

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What Is A Value Chain ?  Every organization consists of a chain of activities that link together to develop the value of the business. They are basically purchasing of raw materials, manufacturing, distribution, and marketing of goods and services. These activities taken together form its value chain.  The value chain identifies where the value is added in the process and links it with the main functional parts of the organization. It is used for developing competitive advantage because such chains tend to be unique to an organization. According to Porter, customer value is derived from three basic sources. i.

Activities that differentiate the product

ii.

Activities that lower its costs

iii. Activities that meet the customer’s need quickly.

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• Value Chain Analysis • According to Porter, value chain activities are divided into two broad categories, as shown in the figure.

1.

Primary activities contribute to the physical creation of the product or service, its sale and transfer to the buyer and its service after the sale.

2.

Support activities include such activities as procurement, HR etc. which either add value by themselves or add value through primary activities and other support activities.

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• Primary Activities  Inbound Logistics: WARE HOUSING, MATERIAL HANDLING ETC….  Operations: activities that convert inputs into final product like packaging, assembly, testing equipment maintenance.

 Outbound Logistics : related to distribution of final product to customers …..finished goods warehousing, vehicle operation ….  Marketing and sales: includes activity related to purchase of finished goods by customers …,.advertising, promotion, sales force….

 Services related to increasing & maintaining the value : repair, parts supply………………

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Support Activities  Procurement: providing raw material or consumable items like machinery office equipment……….

 Technology Development : software development, design improvement ,R&D Process

 Human Resource Management: labour relations, hiring training …………..

 Firm Infrastructure general management, strategic planning, quality control system

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Value Chain Analysis

Firm infrastructure HRM Technology Development Procurement Inbound logistics

Operations

Outbound

Market and

logistics

sales

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Conducting A Value Chain Analysis •

Value chain analysis involves the following steps.



Identify activities



Allocate costs



Identify the activities that differentiate the firm



Examine the value chain i.e. activities that are imp. For buyersatisfaction

•

In assessing the value chains there are two levels that must be addressed.

1.

Interrelationships among the activities within the firm.

2.

Relationships among the activities within the firm and with other organizations that are a part of the firm’s expanded value chain.

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Usefulness Of The Value Chain Analysis •

The value chain analysis is useful to recognize that individual activities in the overall production process play an important role in determining the cost, quality and image of the end- product or service.

•

Analyzing the separate activities in the value chain helps management to address the following issues:

i.

Which activities are the most critical in reducing cost or adding value? If quality is a key consumer value, then ensuring quality of supplies would be a critical success factor.

ii.

What are the key cost or value drivers in the value chain?

iii.

What linkages help to reduce cost, enhance value or discourage imitation?

iv.

How do these linkages relate to the cost and value drivers?

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Porter identified the following as the most important cost and value drivers    

  

Economies of scale Pattern of capacity utilization (including the efficiency of production processes and labour productivity) Linkages between activities (for example, timing of deliveries affect storage costs, just-in time system minimizes inventory costs) Interrelationships (for example, joint purchasing by two units reduces input costs) Geographical location (for example, proximity to supplies reduces input costs) Policy choices (such as the choices on the product mix, the number of suppliers used, wage costs, skills requirements and other human resource policies affect costs) Institutional factors (which include political and legal factors, each of which can have a significant impact on costs). •

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Value Drivers • Value drivers are similar to cost drivers, but they relate to other features (other than low price) valued by buyers. Identifying value derivers comes from understanding customer requirements, which may include:

i.

Policy choices (choices such as product features, quality of input materials, provision of customer services and skills and experience of staff).

ii. Linkages between activities (for example, between suppliers and buyers; sales and after-sales staff).

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Conclusion •

Since Porter introduced his value chain in the mid-1980s, strategic planners and consultants used it extensively to map out a company’s strengths and shortcomings.

 In analyzing strategic alliances and merger and acquisition deals, the value chain is often used to get a quick overview of the possible match: one company is strong in logistics, the other in sales and service, together they would make an agile, highly commercial enterprise.  Measuring or rating competitive strengths is difficult. Especially when trying to map the entire value chain and apply quantitative measurements or ratings, many companies usually employ a large number of strategic analysts, planners and consultants.

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Conducting A Value Chain Analysis •

Value chain analysis involves the following steps.



Identify activities



Allocate costs



Identify the activities that differentiate the firm



Examine the value chain i.e. activities that are imp. For buyersatisfaction

•

In assessing the value chains there are two levels that must be addressed.

1.

Interrelationships among the activities within the firm.

2.

Relationships among the activities within the firm and with other organizations that are a part of the firm’s expanded value chain.

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Usefulness Of The Value Chain Analysis •

The value chain analysis is useful to recognize that individual activities in the overall production process play an important role in determining the cost, quality and image of the end- product or service.

•

Analyzing the separate activities in the value chain helps management to address the following issues:

i.

Which activities are the most critical in reducing cost or adding value? If quality is a key consumer value, then ensuring quality of supplies would be a critical success factor.

ii.

What are the key cost or value drivers in the value chain?

iii.

What linkages help to reduce cost, enhance value or discourage imitation?

iv.

How do these linkages relate to the cost and value drivers?

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Resource Based Approach Resources are the important input which helps to execute business operations . • It is a tool used to find out the strategic resources available to a company. • It defines the ability of a company to deliver sustainable competitive advantage. Following are some criteria fulfilled by resources: 1. It must help company to employ a useful strategy, by either performing better than its competitors or reducing its weakness. 2. If resource are controlled by only one company it could be source of competitive advantage and this advantage can be sustained if competitors are not able to copy your resource and its outcome. 3. A resource must not have any substitute

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Strategic Budget • Planning a budget helps organizations to allocate their resources evaluate ,performance and formulate strategies. • The process of planning the financial operations of a business is called budgeting, this process involves determining business fixed & variable costs on a monthly basis and deciding on an allocation of funds to reflect the business goals.

• • • • •

Key components of budget Determining & establishing the priorities Collaborative and consultative decisions Clear & concise performance expectations Continuous & effective communication Precise information NMBA041 (STRATEGIC MANAGEMENT)

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Corporate Budgeting –Concept • It is a process which helps to identify how much revenue organization can possibly make in next one to five years and how much funds the organization requires to earn that revenue. • It is not only a process to establish a plan on how you are going to achieve your profit for the next one year, but it is also a time for you to review how you have done in the past one year

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Types of budget • • • •

Sales budget Production budget Cash budget Sale/marketing/administrative expense budget

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Strategic Audit • Strategic audit is an examination and evaluation of areas affected by the operation of a strategic management process within an organization. A strategy audit may be needed under the following conditions: • Performance indicators show that a strategy is not working or is producing negative side effects. • High-priority items in the strategic plan are not being accomplished. • A shift or change occurs in the external environment. • Management wishes: (1) to fine-tune a successful strategy and (2) to ensure that a strategy that has worked in the past continues to be in tune with subtle internal or external changes that may have occurred. • To aid in control, firms will occasionally perform audits to ensure that certain aspects of their operations are in order. Such audit may include operational audits (assessing the firm's operating health) and strategic audits (assessing the firm's strategic health).

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• There are several generally accepted methods for measuring organizational performance. • One way for categorizing these methods divides into the distinct types: qualitative and quantitative.. • There is no universally endorsed list of critical questions designed to reflect important facets of organizational operations. However, several that might be useful to the practicing managers are presented below. NMBA041 (STRATEGIC MANAGEMENT)

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Quantitative measurements • Quantitative measurements provide information and insight as to how well an organization is accomplishing its goods and objectives. In attempting to evaluate the effectiveness of corporate strategy quantitatively, we can see how the firm has done compared wit its own history, or compared with its competitors. • Many quantitative measures may be developed to determine performance results. These standards expressed in quantitative terms include: • Sales (growth of sales) • Net profit • Dividend returns • Return on equity • Return on investment • Return on capital • Marker share • Earnings per share NMBA041 (STRATEGIC MANAGEMENT)

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Qualitative measurements methods • Qualitative measurements methods can be very useful, but their application involves significant amounts of human judgment. Thus, conclusions based on such methods must be drawn carefully.

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Sample Questions to be asked for Qualitative Organizational Measurement • • • •

• • •

•

Are the financial policies with respect to investment… dividends and financing consistent with opportunities likely to be available? Has the company defined the market segments in which it intends to operate sufficiently specifically with respect to both product lines and market segments? Has it clearly defined the key capabilities needed for success? Does the company have a viable plan for developing a significant and defensible superiority over competition with respect to these capabilities? Will the business segments in which the company operates provide adequate opportunities for achieving corporate objectives? Do they appear as attractive as to make it likely that an excessive amount of investment will be drawn to the market from other companies? Is adequate provision being made to develop attractive new investment opportunities? Are the management, financial, technical and other resources of the company really adequate to justify an expectation of maintaining superiority over competition in the key areas of capability? Does the company have operations in which it is not reasonable to expect to be more capable than competition? If so, can the board expect them to generate adequate returns on invested capital? Is there any justification for investing further in such operations, even just to maintain them? Has the company selected business that can reinforce each other by contributing jointly to the development of key capabilities? Or are there competitors that have combinations of operations which provide them with an opportunity to gain superiority in the key resource areas? Can the company's scope of operations be revised so as to improve its position vis-à-vis competition? To the extent that operations are diversified, has the company recognized and provided for the special management and control systems required?

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SWOT Analysis • SWOT stands for strengths, weaknesses, opportunities and threats. It is a widely used to summaries a company’s situation or current position. • Environmental and industry analyses provide information needed to identify opportunities and threats, while internal analysis provides information needed to identify strengths and weaknesses. These are the fundamental areas of focus in SWOT analysis.

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Carrying Out SWOT Analysis The first thing that a SWOT analysis does is to evaluate the strengths and weaknesses in terms of skills, resources and competencies.

• • • • • • • • • • •

Strengths Strong brand image High quality products Latest technology High intellectual capital Cordial industrial relations Opportunities New markets Profitable new acquisitions R&D skills in new areas New businesses

• • • • •

Weaknesses Weak distribution network Narrow product lines Rising costs Poor marketing plan

• • • • • •

Threats Increase in competition Barriers to entry Change in consumer tastes New or substitute products Threat of takeover

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Steps In SWOT Analysis • The three important steps in SWOT analysis are: 1. Identification:    

2. 

3. •   

Identify company resource strengths and competitive capabilities Identify company resource weaknesses and competitive deficiencies Identify company’s opportunities Identify external threats

Conclusion: Draw conclusions about the company’s overall situation.

Translation: Translate the conclusions into strategic actions by acting on them: Match the company’s strategy to its strengths and opportunities Correct important weaknesses Defend against external threats

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• 

In devising a SWOT analysis, there are several factors that will enhance the quality of the material: Keep it brief, pages of analysis are usually not required.



Relate strengths and weaknesses, wherever possible, to industry key factors for success.



Strengths and weaknesses should also be stated in competitive terms, that is, in comparison with competitors.



Statements should be specific





Analysis should reflect the gap, that is, where the company wishes to be and where it is now.

It is important to be realistic about the strengths and weaknesses of one’s own and competitive organizations.

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Critical Assessment Of SWOT Analysis Advantages 1. 2.

3.

It is simple. It portrays the essence of strategy formulation: matching a firm’s internal strengths and weaknesses with its external opportunities and threats. SWOT analysis improves the quality of internal analysis.

Limitations

1

it does not show the dynamics of competitive environment.

2 SWOT emphasizes a single dimension of strategy (i.e. strength or weakness) and ignores other factors needed for competitive success. 3 A firm’s strengths do not necessarily help the firm create value or competitive advantage. 4 SWOT’s focus on the external environment is too narrow. NMBA041 (STRATEGIC MANAGEMENT)

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TOWS Matrix •

TOWS matrix is just an extension of SWOT matrix. TOWS stand for threats, opportunities, weaknesses and strengths. This matrix was proposed by Heinz Weihrich as a strategy formulation – matching tool. Internal factors/ External factors

Strengths (S)

Weaknesses (W)

Opportunities (O)

SO strategies: strategies that use strengths to take advantage of opportunities.

WO strategies: strategies that take advantage of opportunities by over -coming weaknesses

Threats (T)

ST strategies: strategies that use strengths to avoid threats.

WT strategies: strategies that minimize weaknesses and avoid threats. NMBA041 (STRATEGIC MANAGEMENT)

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Steps of TOWS matrix 1. List external opportunities available in the company’s current and future environment, in the ‘opportunities block’ on the left side of the matrix. 2.

List external threats facing the company now and in future in the “threats block” on the left side of the matrix.

3.

List the specific areas of current and future strengths for the company, in the “strengths block” across the top of the matrix.

4.

List the specific areas of current and future weaknesses for the company in the “weaknesses box” across the top of the matrix.

5.

Generate a series of possible alternative strategies for the company based on particular combinations of the four sets of factors.

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Corporate Strategy



Strategy formulation in a multi-business enterprise is different from strategy formulation in a single-business enterprise.

 In a single-business enterprise, the key question is how to compete successfully in the chosen market.  So, there is only one-level strategy known as business-level Strategy.  But in a multi-business enterprise, which is involved in several businesses, there is a need to have strategies at two levels – a corporate level strategy for the company as a whole and a business level strategy for each of the separate businesses of the company. NMBA041 (STRATEGIC MANAGEMENT)

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Types Of Corporate Strategies • • • •

Stability Strategy Growth / Expansion Strategies Defensive :Strategies/Retrenchment Combination strategy

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Types Of Corporate Strategies • There are four types of strategic alternatives available at corporate level. They are: 1. Stability Strategy

 Stability strategy implies continuing the current activities of the firm without any significant change in direction.  Stability strategy is most likely to be pursued by small businesses or firms in a mature stage of development.  No major functional changes are made in the product-line, markets or functions.  Improve efficiency in current positions NMBA041 (STRATEGIC MANAGEMENT)

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Why do companies pursue a stability strategy? • The firm is doing well or perceives itself

as successful. i. It is less risky. ii. It is easier and more comfortable. iii. The environment is relatively unstable. iv. Too much expansion can lead to inefficiencies. NMBA041 (STRATEGIC MANAGEMENT)

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Types of Stability Strategies • Some of the popular stability strategies are: 1. Pause/proceed with caution strategy(i.e. for temporary period mainly to consolidate its position)

2. No change strategy i.e. doing nothing new if no major threat, opportunities., strength, weakness

3. Profit strategy i.e. is an attempt to artificially maintain profit by reducing investment/ short term expenditure .it is good for short period not for long . NMBA041 (STRATEGIC MANAGEMENT)

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2- Growth / Expansion Strategies • Growth strategies are the most widely pursued corporate strategies. A company can grow internally by expanding its operations or it can grow externally through mergers, acquisitions, joint ventures or strategic alliances.

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Reasons for pursuing growth strategies: • Firms generally pursue growth strategies for the following reasons: i.

To obtain economies of scale

ii.

To attract merit

iii.

To increase profits

iv.

To become a market leader

v.

To fulfill natural desire to have growth.

vi.

To ensure survival NMBA041 (STRATEGIC MANAGEMENT)

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•

Growth strategies can be divided into three broad categories:

A)Intensive strategies: 1.

Market penetration

2.

Market development

3.

Product development

B ) Diversification strategies: 1.

Concentric diversification

2.

Conglomerate Diversification

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Market penetration • Is a strategy to increase market share for existing products (increasing advt. expenditure, reducing prices, improving distribution)

• Divided into two more category: 1) Consolidation : protecting/ maintain market share in existing market (mature & growing market) 2) Withdrawal : when competition is intense & org. unable to match the rivals.

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Market Penetration • In an era in which Indian Textile manufacturers had no brand pull at the consumer end, Reliance – an original retail textile trader introduced the then powerful brand with an equally powerful slogan:

ONLY VIMAL • Thousands of Vimal showrooms • opened along the length & breadth of India NMBA041 (STRATEGIC MANAGEMENT)

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• Classic Examples 1. Brush Before bed [Potential to double usage] 2. Thrice-a-day moisturizer 3. Chaar boond [Ujala], Sirf aadha chamach [Eastern] [By highlighting on small quantity / use, subtle push for increasing usage regularity 4. Coupon System for loyalty 5. Milkmaid’s FREE cookery booklet [Increases occasions for usage] NMBA041 (STRATEGIC MANAGEMENT)

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Market development • This strategy seeks new market for existing products. • by entering geographical areas, targeting new groups of customers, developing new uses for a product • Hindustan lever introduced low price detergent “wheel” to compete Nirma • Global specialists – Coca Cola, Pepsi, Mc Donald's, KFC, Nike, Visa cards, DELL

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• The key focus of this strategy is setting up of Distribution Channels • Indian IT industry’s foray into Non-US / NonEurope markets is an attempt to replicate existing success with exist product portfolios into new markets [Japan, SE Asia etc] • “Why should boys have all the pleasure” – an ad plan that is specifically targeting a demographic market [Ladies] for 2 wheeler sale NMBA041 (STRATEGIC MANAGEMENT)

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Product development • It involves development of new products or altering the existing product according to new market trend. Examples • Pepsi bringing in Pepsi Gold • Any new mutual funs offer – Mid cap {tomorrow’s jumbos] types • Soap operas from Ektaa Kapoor / Balaji Tele films • Microsoft's latest Version [forced upgrades with little value at the lower user end] NMBA041 (STRATEGIC MANAGEMENT)

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Diversification. • It is a strategy where both the product & market are new to corporation. • Diversification itself includes various options: 1) Horizontal diversification: occurs when new products are introduced to current market 2) Vertical diversification: occurs when org decides to move into its suppliers(invest in producing raw material)/ customers business(retailer) 3) Concentric diversification: occurs when new product closely related to current products are introduced into new market 4) Conglomerate :occurs when completely new tech. unrelated product are introduced to new market NMBA041 (STRATEGIC MANAGEMENT)

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Examples of Concentric Diversification • Amul moving from Milk to all milk based products to non-milk based drinks • All FMCG moves [Synergies of Brand, S&D] • All Consumer Durables moves [Synergies in Brand, Technology, R&D] • AVV moving from Engg to B School to Medical School to Journalism School

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Examples of Conglomerate Diversification • Essar & Telecom [They are a basic shipping, steel & heavy engg company] • All efforts of ITC [Moving out of the shadows of tobacco]

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Sl. No

Concentric

Conglomerate

Diversification

Diversification

1

The company diversifies into The company diversifies into businesses related to the existing businesses that are unrelated to the businesses. existing businesses.

2

There

is

commonality

in No commonality in markets, products

markets, products or technology. or technology. 3

The main objective is to increase The main objective is to increase shareholder value through shareholder value through profit “synergy”, which is achieved maximization. through sharing of skills, resources and capabilities.

4

Less risky.

More risky. NMBA041 (STRATEGIC MANAGEMENT)

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C. Integration strategies 1. Vertical integration : mean gaining ownership or increased control over suppliers / distributors i. Backward integration: involves gaining ownership or increased control of a firms suppliers e.g. Mc Donald’s has its own diaries [milk & beef], poultries [chicken & eggs] and farmlands [wheat & potatoes] – full control on raw material quantity, quality & pricing [Similarly Starbucks & Coffee plantations in Venezuela] ii.

Forward integration: involves or increased control over distributors /retailers

e.g. Brands [who are essentially manufacturers] setting up their own retail showrooms

for direct sale to end customer – Nike, Arrow, Peter England, Adidas – All originally manufacturers who have enter into retail

2. Horizontal integration : is a strategy of seeking ownership or increased control over’s firms competitors e.g. acquisition of Arcelor by Mittal steel NMBA041 (STRATEGIC MANAGEMENT)

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Defensive Strategies These strategies are also called retrenchment strategies. They are the last resort strategies. A company may pursue retrenchment strategies when it has a weak competitive position in some or all of its product lines resulting in poor performance – sales are down and profits are decreasing. In an attempt to eliminate the weaknesses that are dragging the company down, management may follow one or more of the following retrenchment strategies. i.

Turnaround

ii.

Divestment

iii.

Bankruptcy

iv.

Liquidation NMBA041 (STRATEGIC MANAGEMENT)

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• Turnaround: process of recovering the firm from severe cash problem is called recovery it includes three phases:  diagnosis of problem.  Involves analyzing the cause of sickness  Implementation of change process & its monitoring. • Divestment: part of org. is sell to raise capital for further investment for unprofitable business ,requiring too much of capital, does not suit with other activities o f org.  Bankruptcy :filing a petition in court for legal protection in case firm not

in a position to repay its debt  Liquidation : when entire company is dissolved & its assets are sold it is a last option NMBA041 (STRATEGIC MANAGEMENT)

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Combination Strategy company can pursue a combination of two or more corporate strategies simultaneously. But a combination strategy can be exceptionally risky if carried too far. • Priorities must be established. A

 In large diversified companies, a combination strategy is commonly employed when different divisions pursue different strategies. NMBA041 (STRATEGIC MANAGEMENT)

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Corporate parenting • The manner in which corporate office manages & develops the individual business in multi business company is known as Corporate parenting • Corporate parenting views the corporation in terms of resources and capabilities that can be used to build business units’ value as well as generate synergies across business units. NMBA041 (STRATEGIC MANAGEMENT)

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Developing a Corporate Parenting Strategy • Every diversified corporation must address two crucial questions: a) What businesses should this company own and why? b) What

organizational

structure,

management

processes, and philosophy will leads to superior

performance from the company’s business units?

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• Campbell, Goold and Alexander recommend that the search for appropriate corporate strategy involves three analytical steps:  First examine each business unit in terms of its strategic factors.  Second, examine each business unit in terms of areas in which performance can be improved.

 Third, analyze how the parenting corporation fits well with the business unit NMBA041 (STRATEGIC MANAGEMENT)

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• Campbell, Goold and Alexander recommend that the search for appropriate corporate strategy involves three analytical steps:  First examine each business unit in terms of its strategic factors.  Second, examine each business unit in terms of areas in which performance can be improved.

 Third, analyze how the parenting corporation fits well with the business unit. NMBA041 (STRATEGIC MANAGEMENT)

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Parenting-Fix Matrix •

Campbell, Goold and Alexander further recommend the use of a parenting-fit matrix, which emphasizes the fit of the business units with the corporate parent.

 This matrix has two dimensions: the positive contribution (fit between parenting opportunities and parenting characteristics) and the negative effect (misfit between strategic factors and parenting characteristics).

 The combination of these two dimensions creates five different positions, each with its own implications for corporate strategy.

Parenting-Fit Matrix Low Heartland

Ballast Edge of Heartland

Alien Territory

Value Trap

High Low

High

FIT between parenting opportunities and parenting characteristics

1.Heartland Business

Heartland businesses have opportunities for improvement by the parent, and parent understands their strategic factors well. Their business should have priority for all corporate activities

2.Edge-of Heartland Some parenting characteristics fit the business, but others do not Parent may not really understand all of the strategic factors Such business units are likely to consume much of the parent’s attention Parents need to know when to interfere in business unit activities and strategies and when to keep at arm’s

3.Ballast business Fit very well with the parent corporation but contains very few opportunities to be improved by the parent Units that have been with the corporation for many years and have been very successful Parents may have added value in the past, but it can no longer find opportunities Like cash cows they may be important sources of stability and earnings They can also be a drag on the corporations as a whole by slowing growth and distracting present from more productive activities

4.Alien Territory Businesses Have little opportunity to be improved by the corporate parent  A misfit exists between the parenting characteristics and unit’s strategic factors Little opportunity for value creation but high potential for value destruction on the part of parent 5.Value Trap Businesses Fit well with the parenting opportunities, but are misfits with the parent’s understanding of unit’s strategic factors Corporate head quarters mistakes what it sees as an opportunity for ways to improve the S.B.U.’s profitability or competitive position

What is Strategic Planning? • Strategic planning is an organizations process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy. • What do want to do? • How do we best excel? • Where do we want the company to be?

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main process for strategic planning. • • • • • • • • •

Phase1 -reference the mission Phase2- take stock outside and inside the system Phase3- analyze the situation –internal & external Phase 4- establish goals Phase5- establish strategies to reach goals Phase6- establish objectives along the way to achieve goals Phase7-give timeline & responsibilities with each objectives Phase8- write & communicate a plan documents Phase9- acknowledge completion and celebrate success

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corporate restructuring • The process involved in changing the organization of a business. Corporate restructuring can involve making dramatic changes to a business by cutting out or merging departments that often has the effect of displacing staff members. OR Corporate restructuring is the process of redesigning one or more aspects of a company. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction. NMBA041 (STRATEGIC MANAGEMENT)

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Restructuring • A strategy through which a firm changes its set of businesses or financial structure – Failure of an acquisition strategy often precedes a restructuring strategy – Restructuring may occur because of changes in the external or internal environments

• Restructuring strategies: – Downsizing – Downscoping – Leveraged buyouts NMBA041 (STRATEGIC MANAGEMENT)

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Types • Expansion: Mergers, Acquisitions, Takeovers, Tender offer, Joint Venture • Contraction: Sell offs, Spin offs, Split offs, Split ups, Divestitures, Equity Carve outs • Corporate Control: Takeover Defenses, Share Repurchases, Exchange Offers, Proxy Contests • Changes in Ownership: Leveraged Buyout, Going Private NMBA041 (STRATEGIC MANAGEMENT)

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Types of Restructuring: Downsizing • A reduction in the number of a firm’s employees and sometimes in the number of its operating units – May or may not change the composition of businesses in the company’s portfolio

• Typical reasons for downsizing: – Expectation of improved profitability from cost reductions – Desire or necessity for more efficient operations NMBA041 (STRATEGIC MANAGEMENT)

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Types of Restructuring: Downscoping • A divestiture, spin-off or other means of eliminating businesses unrelated to a firm’s core businesses • A set of actions that causes a firm to strategically refocus on its core businesses – May be accompanied by downsizing, but not eliminating key employees from its primary businesses – Firm can be more effectively managed by the top management team NMBA041 (STRATEGIC MANAGEMENT)

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Restructuring: Leveraged Buyouts • A restructuring strategy whereby a party buys all of a firm’s assets in order to take the firm private – Significant amounts of debt are usually incurred to finance the buyout

• Can correct for managerial mistakes – Managers making decisions that serve their own interests rather than those of shareholders

• Can facilitate entrepreneurial efforts and strategic growth NMBA041 (STRATEGIC MANAGEMENT)

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Mergers and Acquisitions  Merger A merger occurs when two or more organizations of about equal size combine to become one through an exchange of stock or cash or both. Mergers can take place in different ways.  Acquisition An acquisition occurs when a large organization purchases a smaller firm, or vice-versa.  Consolidation If both firms dissolve their identity to create a new firm, it is called consolidation or amalgamation.  Friendly Merger When both firms desire a merger or acquisition, it is termed as a friendly merger. NMBA041 (STRATEGIC MANAGEMENT)

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Reasons for Mergers and Acquisitions To quickly acquire valuable resources To reduce risks and borrowing costs To achieve growth

To gain additional capacity To obtain taxation or investment incentives To gain managerial expertise To acquire market supremacy

To bypass legal hurdles To take over sick units

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Types Of Mergers Horizontal mergers: producing same product Vertical mergers: joining two or more companies involved in different stage of production or distribution of the same product or service Lateral or allied mergers: when firms producing different products which are related in some way

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Conglomerate mergers :two or more companies producing unrelated product

Concentric mergers: take place when there is

combination of two or more organizations related to each other in terms of alternative technology etc…. Circular merger: firms belonging to different industries & different product come under central agency.

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The Merger Process •

Identify Industries

•

Select Sectors

•

Choose Companies

•

Evaluate Cost of Acquisition and Returns

•

Rank the Candidates

•

Identify good candidates

•

Decide the extent of acquisition/retention

•

Merger implementation

•

Post-Merger Integration NMBA041 (STRATEGIC MANAGEMENT)

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Assessing The Suitability Of A Proposal  Availability of Funds  Likely Positive Synergies  Negative Synergies  Is Timing Appropriate?  Is the required Management Style Available? NMBA041 (STRATEGIC MANAGEMENT)

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The Merger Failure • Howe (1986) has identified five main reasons, for merger failure: 1. Little thought towards the contribution of an acquisition to the acquiring firm’s objectives.

2. Failure to compare acquisitions with alternative means of achieving corporate objectives. 3. Insufficient attention to the financial details of mergers.

4. Insufficient familiarity with the business of target firms. 5. Insufficient attention to post-merger planning. NMBA041 (STRATEGIC MANAGEMENT)

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What is meant by Strategic Alliance? Definition 1:

An agreement between two or more individuals or entities stating that the involved parties will act in a certain way in order to achieve a common goal. Strategic alliance usually make sense when the parties involved have Complementary strengths. Definition 2: Strategic alliances are innovative and interesting forms of relationships between organizations. Organizations create alliances in their quest to compete against fast & nimble competitors. NMBA041 (STRATEGIC MANAGEMENT)

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What is Meant by Strategic Alliance? cont’d

Definition 3: Strategic alliances are agreements between companies (partners) to reach objectives of a common interest. Alliances are among the various options which companies can use to achieve their goals. They are based on cooperation between companies. NMBA041 (STRATEGIC MANAGEMENT)

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Purposes of Strategic Alliances • Competition is shifting from a "firm versus firm perspective" to a "supply chain versus supply chain perspective." Therefore, firms seeking competitive advantage are participating in cooperative supply chain arrangements, such as strategic alliances, which combine their individual strengths & unique resources.

• Enabling a firm to focus resources on its core skills & competencies while acquiring other components or capabilities it lacks from the marketplace. • Alliances can often improve market power of a firm because either the alliance partner is a customer for the product or because the distribution channels & buying power of the partners can be combined NMBA041 (STRATEGIC MANAGEMENT)

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Purposes of Strategic Alliances cont’d • Alliances enable buying & supplying firms to combine their individual strengths & work together to reduce non-valueadding activities & facilitate improved performance. • In order for both parties to remain committed to this form of relationship, mutual benefit must exist (i.e. a "win-win" relationship)

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Success Factors • Selection: – Strategically evaluate which upstream & downstream members should be included in the supply chain to create a highly competitive & efficient supply network. – Selecting strategic partner should be based on company’s goals, objectives & values system. – Select partners who have competencies in collaboration & those who already have a proven ability to work in a collaborative environment. • Intention:

Both partners should acknowledge their mutual dependence & their willingness to work for the survival & prosperity of the relationship.

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Success Factors cont’d • Trust: – Existence of trust in a relationship reduces perception of risk associated with opportunistic behavior as this generates greater profits & serve customers better • Communication: – Communication is critical for building successful relationships to achieve the benefits of collaboration as it allows partners to understand alliance goals, roles, responsibilities & helps with the sharing & dissemination of individual experiences • Conflict Resolution:

– Firms should be motivated to engage in joint problem solving as they are, by definition, linked together to manage an environment that was more uncertain & turbulent than each one could control. NMBA041 (STRATEGIC MANAGEMENT)

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Success Factors cont’d •

Developing a focused winning strategy for the alliance: – Based on distinctive competencies and competitive advantages of the partners in the selected target market (s). – To be able to manage the company cultural challenges that may arise between the alliance partners.

•

Progressive learning & value capturing: – Learning involves significant transfer of tacit, specialized & complex knowledge. Learning requires close collaboration of both firms to overcome transfer challenges as knowledge, values, culture and organizational forms.

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Success Factors cont’d • Respect and protect the brand of each partner. • Determine and align decision rights: – To define what decisions are important to the alliance, which partner should make them and how the decisions will be made and monitored.

• Exit Strategy: – Agree upon an exit strategy for the alliance. It Is important to have agreement in advance on how the alliance will be concluded if and when it may fail and/or when it has fulfilled its mission and achieved its goals and objectives

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Mistakes Leading to Failure • Alliance business is viewed internally by one partner. • One of the partners is too dependant on the other’s capabilities. • Problems and dilemmas of mistrust. • Cultural & language barriers. • Collaboration in competitively sensitive areas can be difficult. • A clash of egos might occur. NMBA041 (STRATEGIC MANAGEMENT)

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Types of Strategic Alliances • Joint Venture: an agreement by two or more parties to form a single entity to undertake a certain project. Each of the businesses has an equity stake in the individual business and share revenues, expenses & profits.

• Outsourcing • Global Strategic Alliances: working partnerships between companies (often more than 2) across national boundaries & increasingly across industries. Sometimes formed between company & a foreign government, or among companies & governments NMBA041 (STRATEGIC MANAGEMENT)

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Types of Strategic Alliances cont’d • Equity strategic alliance: an alliance in which 2 or more firms own different percentages of the company they have formed by combining some of their resources & capabilities to create a competitive advantage. • Non- equity strategic alliance: an alliance in which 2 or more firms develop a contractual-relationship to share some of their unique resources & capabilities to create a competitive advantage. NMBA041 (STRATEGIC MANAGEMENT)

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Types of Strategic Alliances cont’d • Distributors: Recruiingt distributors, where each one has its own geographical area or type of product. This ensures that each distributor’s success can be easily measured against other distributors. • Distribution Relationships: This is perhaps the most common form of alliance. Strategic alliances are usually formed because the businesses involved want more customers. The result is that cross-promotion agreements are established. • Product Licensing: This is similar to technology licensing except that the license provided is only to manufacture and sell a certain product. Usually each licensee will be given an exclusive geographic area to which they can sell to. It’s a lower-risk way of expanding the reach of your product compared to building your manufacturing base and distribution reach.

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Types of Strategic Alliances cont’d • R&D: Strategic alliances based around R&D tend to fall into the joint venture category, where two or more businesses decide to embark on a research venture through forming a new entity. • Franchising: is an excellent way of quickly rolling out a successful concept nationwide. Franchisees pay a set-up fee & agree to ongoing payments so the process is financially risk-free for the company. However, downsides do exist, particularly with the loss of control over how franchisees run their franchise.

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Examples of Alliances • Nokia and Microsoft in alliance to make Zune phone

• Star Alliance – Airlines alliances. • Philips and Sony jointly launched the mini-CD. • Nestlé and Fonterra Sign Agreement on Dairy Alliance for the America • McDonald’s with Disney, Coca-Cola & Walmart • Online grocer Webvan Group forms alliances with foodmakers: Kellogg, Nestle, Pillsbury, Quaker • .

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Examples of Alliances cont’d • Motorola-Toshiba: In 1987- Toshiba to produce microprocessors & contribute access to the distribution network. • Boeing, General Dynamics & Lockeed in the early 90’s, these companies united to win a bid put forth by the Pentagon for the construction of a tactical combat destroyer. • Alcatel –Fujistsu made a joint venture to develop the equipment for the third generation of cellular telephone • Samsung & Sun Microsystems cooperated in solution business and next generation business computing system.

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Portfolio Analysis •

Portfolio analysis is an analytical tool which views a corporation as a basket or portfolio of products or business units to be managed for the best possible returns.

•

The aim of portfolio analysis is:

i.

To analyze its current business portfolio and decide which business should investment.

ii.

To develop growth strategies for adding new businesses to the portfolio.

iii.

To decide which business should no longer be retained.

receive more or less

•

Balancing the portfolio

•

Balancing the portfolio means that the different products or businesses in the portfolio have to be balanced with respect to four basic aspects:

1. 2.

Profitability Cash flow

3. 4.

Growth Risk NMBA041 (STRATEGIC MANAGEMENT)

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The BCG Matrix  The BCG matrix was developed by the Boston Consultancy group in 1970s. It is also called the “Growth share matrix”.  BCG matrix is based on the assumption that majority of the companies carry out multiple business activities in a number of different product-market segments.  To ensure long-term success, a company’s business portfolio should consist of both high-growth products in need of cash inputs and low-growth products that generate excess cash.

•

Its basic purpose is to invest where there is growth from which the firm can benefit, and divest those businesses that have low market share and low growth prospects.

•

Each of the products or business units is plotted on a two-dimensional matrix consisting of:

a) Relative market share/ competitive position (it is defined as ratio of its market share in relation to

its largest competitor with in the industry. A business unit that have market

High market growth rate

share more than 1.0 is leader. )

b) Its industry growth rate.(if

Low market growth rate

The BCG Matrix

Stars

Cash Cows

Question Marks

Dogs

Industry is growing faster than Economy it is a high growth industry else vice versa)

High relative market share

Low relative market share

Analysis Of BCG Matrix •

The BCG matrix reflects the contribution of the products or business units to its

cash flow. Based on this analysis, the products or business units are classified as: 

Stars (high growth, high market share) represent most favorable growth & investment opportunities. As such resources should be allocated to them



Cash cows (low growth/ mature industries, high market share) need less in terms of resource allocation



Question Marks (High Growth, Low Market Share) also known as problem child, increase market share / disinvest.



Dogs (Low Growth, Low Market Share) so less resources should be allocated option is to disinvest.

•

so, main strategy should be to maintain the position of cows. The cash from cows can be used to consolidate the position the position of stars . • Any surplus remaining then can be used to question marks

S.No.

Business Type

Cash Source

Cash Use

Net Cash Balance

1

Cow

More

Less

Funds available, so milk and deploy

2

Star

More

More

Build competitive position and grow

3

Dog

Less

Less

Divest or redeploy proceeds

4

Question Mark

Less

More

Funds needed to invest selectively to improve competitive position

Critical Assessment Of BCG Matrix • Merits: 1. It is easy to use 2. It is quantifiable 3. It draws attention to the cash flows 4. It draws attention to the investment needs Demerits: 1. It is too simplistic. 2. Link between market share and profitability is not strong. 3. Growth rate is only one aspect of industry attractiveness. 4. It is not always clear how markets should be defined. 5. Market share is considered as the only aspect of overall competitive position. 6. Many products or business units fall right in the middle of the matrix, and cannot easily be classified

GE’s nine cell matrix This matrix was developed in Business strength

1970s by the General Electric

Strong

Average

Weak

Company with the assistance of

the

consulting

firm,

also called GE Multifactor Portfolio matrix.

Industry attractiveness

McKinsey & Co., USA. This is

High

A

C

Medium

B

D

Low

• This matrix based on two variables -business strength -industry attractiveness • business strength based on relative market share, profit margins, knowledge of market & customer, technological capacity, strength of management • Industry attractiveness based on market size, profit margin of industry, technology, social, environmental aspects

STOPLIGHT STRATEGY • Zone • Green

business strength is strong& industry is strong .Decision is invest/expand.

business strength is low, industry

• Yellow

attractiveness is high. Decision is earn /select

business strength Is weak/average & attractiveness is

• Red

low/medium , Decision - divestment

Strong

Industry Attractiveness [More Comprehensive than Market Growth]

High

Medium

Low

Protect Position

Medium

Invest to Build

Weak

Build Selectively

Build Selectively

Manage for Earnings

Harvest

Protect & Refocus

Harvest

Divest

Competitive Strength [More Comprehensive than RMS]

GE 9 Cell Matrix for PepsiCo High

Competitive Strengths

High

Attractiveness

Snack Foods

Low

Soft Drinks

Low

Difference between BCG and GE matrices BCG Matrix

GE Matrix

1.

BCG matrix consists of four cells

1.

GE matrix consists of nine cells

2.

The business unit is rated against the following two criteria

2.

The business unit is rated against the following criteria

i.

relative market share

i.

business strength

ii.

industry growth rate.

ii.

industry attractiveness.

3.

The matrix uses single measures to assess growth and market share.

3.

The matrix uses multiple measures to assess business strength and industry attractiveness

4.

The matrix uses two types of classification i.e. high and low

4.

The matrix uses three types of classification (high/medium/low and strong /average /weak).

5.

Has many limitations

5.

GE matrix overcomes many limitations of BCG and is an improvement over it.

Diamond Theory of Competitive Advantage of Nations •

Michael Porter’s “diamond’’ theory of international competitive advantage identifies a ‘diamond’ of four interrelated areas within a nation that assist that country to be more competitive in international markets. The four factors are: i.

Factor conditions

ii.

Demand conditions

iii.

Related and supporting industries

iv.

Firm’s strategy, structure and rivalry

Firm Strategy, Structure & Rivalry

4

1

2

Factor Conditions

Demand Conditions

3

Related & Supporting Industries

1 Factor Conditions

• the good old factors of production in economics – land, labor, capital & natural resources Firm Strategy, • A nation which & is richly endowed with one or more Structure factors obviously Rivalry gains a competitive advantage • America & Agricultural Produce • India & Spices, Brazil & Coffee • South Africa & Diamonds • But Sustained Growth is not achieved by depending only on inherited factor endowments. Cultivated Demand Resources / Capabilities are equally important. Conditions • Only cultivated theory can explain growth of countries like Singapore, Hong Kong, Taiwan and even JAPAN. • Human Resources [English speaking skills for BPO, tech skills for IT, hands on skills for fabrication] • Knowledge Resources [Academic & Tacit] & • Related Infrastructure [Professional / Social, Quality Supporting Vs. Cost] • Add toIndustries all this factors like time commonality/difference, cultural adaptability etc – The Factor part is complete

• The second broad determinant of national competitive advantage in an industry isFirm “Home Demand Strategy, Conditions” for the industry’s product /&service. Structure • Home demand can be split into two – Quantity & Rivalry Quality • The quantity of home demand ensures economies of scale and critical mass production • But it is the quality of home demand that establishes global competitive advantage • sophisticated Factor domestic customers will drive both quality and innovation Conditions • Japanese passion for recording events / travels – Hence Camera • British are renowned for their gardens / gardening – hence Lawnmowers • Italy & its passion for fashion – Hence High End Apparels

Related & Supporting • Porter Diamond concurs that this home demand will slowly get internationalized Industries

2 Demand Conditions

• Competitive advantage for nations occurs when RELATED AND SUPPORTING INDUSTRIES start emerging around the key industry – Firm Strategy, particularly in “industry clusters” Structure & • These supplier industries - who by themselves are internationally competitive sub-industries – Rivalry eventually create a national advantage for the Original “Downstream” industry. • USA leads the world in Computer manufacturing because all key supplier industries are again US [Semiconductor – Intel, O/S – Microsoft, Apple, Factor Demand Applications – Oracle etc] Conditions • Conditions Italy is successful in footwear because it is equally & independently strong in Leather Processing • Back home, Chennai is developing as the Detroit of India with Hyundai, Ford, Chrysler & Mahindra setting up shop because it is equally strong as an auto ancillary vendor. TVS group, Rane Group, Visteon, MRF etc are strong auto ancillary vendors – all operating mainly out of Chennai

Related & Supporting Industries

3

4

Firm Strategy, Structure & Rivalry

• The relevance of industry rivalry in Porter Diamond is slightly different than that in Porter 5 force theory • In 5 force theory, Rivalry is a threat – a force that eats into the existing pie. (i.e. More the rivalry, less healthier the industry) Factor Demand • But in the diamond model, intense domestic rivalry drives innovation and Conditions Conditions upgrading. The pattern of rivalry at home has a profound impact in its ultimate international success • At the same time, highly fragmented domestic competition can be wasteful since it leads to duplication of efforts & prevents reaching economies of Scale. Hence M&A. • Sony, Sanyo, Panasonic, Aiwa, – Japan & Consumer Electronics rivalry • Infosys, TCS, HCL, Satyam, Related Wipro, CTS, & Polaris - India & IT rivalry • In each of these cases, rivalry has promoted the industry at the national level Supporting

Industries

Strategic choice  Strategic choice is essentially a decision-making process. This involves generating feasible alternatives, evaluating those alternatives and choosing a specific course of action that could best enable the firm to achieve its mission and objectives.

 Alternative strategies do not come from a vacuum. They are derived from the firm’s present strategies keeping in view the vision, mission, objectives and also the information gathered from external and internal analysis. They are consistent with or built on past strategies that have worked well.

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Nature Of Strategic Choice • According to Glueck and Jauch, “strategic choice is the decision to select from among the alternatives considered, the strategy which will best meet the enterprise objectives.” • This decision-making process consists of four distinct steps: 1. Focusing on a few alternatives. 2. Considering the selection factors.

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What Is A Functional Strategy? •     

Functional Strategy is the approach taken by a functional area to achieve corporate and business unit objectives and strategies by maximizing resource productivity. It is concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage. Just as a multi-divisional corporation has several business units, each with its own business strategy, each business unit has its own set of departments, each with its own functional strategy. The functional strategies delineate the activities to be undertaken in each part of the business and usually include them as a core part of their action plan. Functional strategies are, thus, detailed statements of the “means’’ or activities that will be used to achieve short-term objectives and establish competitive advantage. A functional strategy is also defined as a short-term “game plane” for a key functional area. NMBA041 (STRATEGIC MANAGEMENT)

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The functional strategies required in key functional areas are outlined below: 1. Financial Strategy

2. Marketing Strategy 3. Hr Strategy

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Need For Functional Strategy • Functional strategies are developed to ensure that: 1.

The strategic decisions are implemented by all the parts of an organization.

2.

There is a basis available for controlling activities in different functional areas of a business.

3.

The time spent by functional managers on decision-making may be reduced.

4.

Similar situations occurring in different functional areas are handled by the functional managers in a consistent manner.

5.

Coordination across different functions takes place where necessary.

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Difference Between Functional Strategy And Business Strategy Functional Strategy 1. Time horizon

Functional

strategies

Business Strategy focus

on short-term goals (one year)

Business strategies focus on the

firm’s

long-term

competitive posture (3 to 5

years) 2. Specificity

Functional strategies provide more specific direction to functional managers by.  helping them to know what needs to be done and focus on results.  facilitating coordination among functional units by clarifying areas of interdependence and potential conflict.

Business strategies provide general direction

3. Participants



Business strategy is the responsibility of the head of the business unit..

Functional strategy is the responsibility of the operating managers of the functional area.

Strategy implementation  Strategy implementation is the process of putting organization’s various strategies into action by setting annual or short-term objectives, allocating resources, developing programmes, policies, structures, functional strategies etc. Even the best strategic plan will be useless unless it is implemented properly.  The strategy implementation is, therefore, the most difficult element of the strategic management process. This is so because there has to be a “fit” between the strategy and the organization.

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Strategy formulation

Strategy implementation

1.Positioning forces before the action.

1.Managing forces during the action.

2.Focuses on effectiveness.

2.Focuses on efficiency.

3.Primarily an intellectual process. 3.Primarily an operational process. 4.Requires good intuitive and analytical skills.

4.Requires motivation and leadership skills.

5.Requires coordination among few individuals

5. Requires coordination among many individuals.

Importance Of Strategy Implementation •

The notion of strategy implementation might at first seem quite simple and straightforward; the strategy is formulated and then it is implemented. However, transforming strategies into action is a far more complex and difficult task.

•

However, strategy implementation has attracted much less attention in strategic management than strategy formulation. Alexander (1991) suggests several reasons for this:



Strategy implementation is less glamorous than strategy formulation



People overlook it because of a belief that everyone can do it



People are not exactly sure where it begins and where it ends



Furthermore, there are only limited number of models of strategy implementation.

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difficulties in implementing strategies • Some of problems are:  Weak management roles in implementation  Lack of communication  Lack of commitment to the strategy

 Unawareness or misunderstanding of strategy  Unaligned organizational systems and structure  Poor coordination and sharing of responsibilities  Inadequate resources and capabilities

 Uncontrollable environmental factors  Problematic and unhealthy culture

Mc Kinsey’s 7-S model •

It is good at capturing the importance of all these elements in the implementation of strategy

. Structure

Strategy

Systems

Super Ordinate Goals Skills

Staff

Style

Mc Kinsey’s 7-S model 1. Super Ordinate Goals; means the goals of a higher order which express the values vision and mission that senior management brings to organization 2. Structure means ;the organizational structure of the company 3. Systems ;means the procedures that make the organization works 4. Style; means the company conducts its business .Top managers in organization can use style to bring about change 5. Staff: refers to those people who need to be developed challenged and encouraged 6. skills ;it is most important capability of an organization 7. Strategy: direction ,scope of organization or the route company chosen to achieve competitive success

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Strategic Information Systems The strategic role of IS involves using IT to develop products, services, and capabilities that give company major advantages over the competitive forces it faces in the global marketplace.

Porter’s Competitive Forces Model • 1. 2. 3. 4. 5.

The five major forces can be generalized as follows: The bargaining power of customers The bargaining power of suppliers The threat of new entrants to firm’s market The threat of substitute products and services The rivalry for competitors within the firm's industry

Porter’s Competitive Forces Model (cont’d) • Competitive strategies: 1. Cost leadership strategy: Producing products/services at the lowest cost in the industry. Ex: Wal-Mart. 2. Differentiation strategy: Distinguish the products and services from those of its competitors. Ex: Dell. 3. Innovation strategy: Finding new ways of doing business. Ex: Amazon.com.

Competitive strategies (cont’d): 4. Growth strategies: Managing regional and global business expansion. Ex: Wal-Mart. 5. Alliances: Working with business partners. Ex: Drugstore.com (online pharmacy) and General Nutrition Centers (GNC) (distributor of vitamins and health foods) formed a partnership that gave Drugstore.com the exclusive rights to sell GNC-branded products.

Value Chain Model • According to Porter’s Value chain model, the activities conducted in any manufacturing organizations can be divided into two parts: Primary activities and support activities. • This model highlights the primary or support activities that add a margin of value to a firm’s products and services where IT can best be applied to achieve a competitive advantage.

Value Chain Model • Primary activities are most directly related to the production and distribution of the firm’s products and services that create value for the customer. Inbound logistics, operations, outbound logistics, marketing and sales, and customer service. • Support activities include procurement of resources, technology development, human resources management, and administrative coordination.

The value chain of a firm

Using IT for Strategic Advantage • -

IT can be used to build a customer focused business to reengineer business processes to improve quality to become an agile company to form a virtual company To build a knowledge-creating company

Customer focused business • Develop a focus on the customer – Customer value • • • •

Best value Understand customer preferences Track market trends Supply products, services, & information anytime, anywhere • Tailored customer service

Reengineering the processes • Business Process Reengineering (BPR) – Rethinking & redesign of business processes – Combines innovation and process improvement – There are risks involved.

Improving quality • Total Quality Management (TQM) – Quality from customer’s perspective – Meeting or exceeding customer expectations – Commitment to:

• • • •

Higher quality Quicker response Greater flexibility Lower cost

• IT can help firms to achieve quality goals by helping them simplify products or processes, make improvements based on customer demands, reduce cycle time and increase the quality of design and production.

Agile company • Old businesses: Low cost, low price, mass production, economy of scale. • New businesses: Global competition, sophisticated customers, customized production. • An agile company can offer customized production, product variety, bring products to market rapidly and cost effectively. Ex: Dell Computers is an agile competitor. • It heavily depends on IT. Ex: Flexible Manufacturing Systems (FMS) help companies become an agile competitor. • A business can use IT to become an agile company.

Virtual company • IT makes the virtual corporation possible. • A virtual company is an organization that uses IT to link people, assets, and ideas to create and distribute products and services without being limited to physical locations or traditional boundaries.

Virtual company • Major attributes of VC: • Each partner brings its core competency so anall star winning team is created. • No single company can match what the VC can achieve. • Resources of the business partners can be put to use more profitably. • It is difficult to identify the boundaries of a VC.

Turnstone sells its products through catalogs

Subcontracted Carriers ship the products to customers

Excel Logistics located in Ohio operates warehouses. Excel’s computers handle all order processing, shipment tracking, etc.

Third-party Company designs and prints catalogs

Send the orders

Virtual company Tele-marketing company takes the orders (Denver, CO) and transmits the order data to computers at the warehouses

Building a Knowledge-creating company • Knowledge management enable companies to learn faster than their competitors giving them a sustainable competitive advantage. • The goal of knowledge management systems is to help organizations create, organize and make available important business knowledge whenever and wherever it’s needed in an organization. • KMSs collect all relevant knowledge and experience in the firm and make it available whenever and wherever it is needed to support management decisions and business processes.

Activity-Based Costing • In contrast to traditional/absorption costing system, ABC system first accumulates overheads costs for each organizational activity, and then assigns the costs of the activities to the products, services, or customers (cost objects) causing that activity. Activity-Based Costing System

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Advantages & Disadvantages Of Activity-Based Costing(ABC) •

Advantages Of Activity-Based Costing(ABC): 1. Product cost determination under activity-based costing is more accurate and reliable because it focuses on the cause and effect linkage of costs and activities in the context of producing goods. 2. Fixation of selling price for multi-products under activity-based costing is fair and correct because overheads are allocated on the basis of relevant cost drivers. 3. Control of overheads consisting of fixed and variable becomes possible by controlling and monitoring activities. Linkage between cost and activities are clearly identified in activitybased costing and thus provides opportunities to control overhead costs. 4. Sufficient information can be obtained to make decisions about the profitability of different product lines. 5. Fair allocation of overheads occupy a considerable portion in the total cost components.

Disadvantages Or Limitations Of Activity-Based Costing(ABC) 1. Difficult to identify the overall activities that influence costs. 2. Not easy to select the most suitable cost drive. 3. Difficult to evaluate cost on the basis of activities. 4. Not suitable for small manufacturing concern NMBA041 (STRATEGIC MANAGEMENT)

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Organizational Life Cycles

Prof. Stephen Block

Phase 1 • Evolutionary Stage: Growth Through Creativity

• Revolutionary Stage: Crisis of Leadership

Phase 1 • Growth Through Creativity - This stage is dominated by the founders of the organization, and the emphasis is on creating both a market and product. These founders are usually technically or entrepreneurially oriented. Management activities are avoided. But as the organization grows, management problems cannot be handled through informal communication. This leads to: • Revolutionary Stage: Crisis of Leadership

Phase 1 • Revolutionary Stage: Crisis of Leadership The question of who is going to lead the organization out of its state of confusion and solve management problems? The solution is to find a strong manager. This crisis leads to the next evolutionary period: • Growth Through Direction

Phase 2 • Evolutionary Stage: Growth Through Direction

• Revolutionary Stage: Crisis of Autonomy

Phase 2 • Evolutionary Stage: Growth Through Direction During this stage, the new manager and key staff take the responsibility for establishing direction, while lower level supervisors are treated as functional specialists than autonomous decision-makers. The demands of lower-level managers for more autonomy eventually leads to the next revolutionary period: • Revolutionary Stage: Crisis of Autonomy

Phase 2 • Revolutionary Stage: Crisis of Autonomy The solution to this crisis is usually greater delegation.

Phase 3 • Evolutionary Stage: Growth Through Delegation

• Revolutionary Stage: Crisis of Control

Phase 3 • Evolutionary Stage: Growth Through Delegation When an organization gets to the growth stage of delegation, it usually begins to develop a decentralized organizational structure, which heightens motivation at lower levels of the organization. Eventually top managers sense they are losing control over a diversified field operation. This leads to: • Revolutionary Stage: Crisis of Control

Phase 3 • Revolutionary Stage: Crisis of Control The crisis of control leads to a return to centralization. This creates resentment among those individuals who feel that their organizational freedoms are being constrained. Searching for an alternative usually leads to: • Evolutionary Stage: Growth Through Coordination

Phase 4 • Evolutionary Stage: Growth Through Coordination

• Revolutionary Stage: Crisis of Red Tape

Phase 4 • Evolutionary Stage: Growth Through Coordination This period is characterized by the use of formal systems for achieving greater coordination with top management as the organizational watchdogs. Most coordination systems get carried away and it leads to: • Revolutionary Stage: Crisis of Red Tape

Phase 4 • Revolutionary Stage: Crisis of Red Tape This crisis most often occurs when the organization has become too large and complex to be managed through formal programs and rigid systems. To overcome the Red Tape mentality, the organization moves to the next stage: • Evolutionary Stage: Growth Through Collaboration

Phase 5 • Evolutionary Stage: Growth Through Collaboration

• Revolutionary Stage: Crisis of ?

Phase 5 • Evolutionary Stage: Growth Through Collaboration This stage emphasizes greater spontaneity in management action through teams and the skillful confrontation of interpersonal differences. Social control and self-discipline take over from formal control. The next “revolutionary stage” was not identified by Griener: • Revolutionary Stage: Crisis of ?

Phase 5 • Revolutionary Stage: Crisis of ? Griener suggests that the next crisis will center on the psychological saturation of employees who have grown emotionally and physically exhausted by the intensity of teamwork and the heavy pressure for innovative solutions.

• Introduction 

Strategic evaluation and control is the final phase in the process of strategic management.



Its basic purpose is to ensure that the strategy is achieving the goals and objectives set for the strategy.



It compares performance with the desired results and provides the feedback necessary for management to take corrective action.



According to Fred R. David1 strategy evaluation includes three basic activities (1) examining the underlying bases of a firm’s strategy, (2) comparing expected results with actual results, and (3) taking corrective action to ensure that performance conforms to plans.



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Types of General Control Systems Basically, there are three types of general control systems:  Output control (i.e. control on actual performance results)  Behaviour control (i.e. control on activities that generate the performance)  Input control (i.e. control on resources that are used in performance)

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• Characteristics Of Effective Control System 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Simple Economical Meaningful Timely Truthful Selective Flexible Suitable Reasonable Objective Acceptable Foster Understanding And Trust Fix Responsibility For Failure

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• Benefits of Strategic Evaluation and Control • There are many benefits of strategic evaluation and control: 1.

It gives feedback

2.

It alerts on potential problems

3.

It helps refine and improve strategy

4.

It helps to change strategy

5.

It helps to identify rewarding behaviour

6.

It helps to fix responsibility

7.

It helps in future planning NMBA041 (STRATEGIC MANAGEMENT)

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•

Criteria For Strategic Control

• Criteria are the standards in terms of which strategies are evaluated. Broadly, there are two types of criteria: 1. Quantitative Criteria • Traditional Financial Measures • Financial Ratios • Some key financial ratios that are particularly useful as criteria for strategic control are as follows: i. ii. iii. iv. v. vi. vii. viii.

Return on investment (ROI) Return on equity (ROE) Earnings per share (EPS) Profit margin Market share Debt-equity Sales growth Asset growth etc. NMBA041 (STRATEGIC MANAGEMENT)

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2. Qualitative Criteria •

A number of criteria have been suggested by different analysts to evaluate strategies, which are qualitative measures of how well the strategy is being implemented. One set of such criteria suggested by Seymour Tiles is as follows: i.

Internal consistency

ii.

Consistency with the environment

iii.

Appropriateness of the strategy in the light of available resources

iv.

Acceptability of the degree of risk involved in the strategy

v.

Appropriateness of the time horizon of the strategy

vi.

Workability of the strategy. NMBA041 (STRATEGIC MANAGEMENT)

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• Strategic Controls •

According to Pearce and Robinson, there are two broad types of control systems or mechanisms. They are:

•

Strategic Controls

•

There are four types of strategic controls:

1.

Premise control

2.

Strategic surveillance

3.

Special alert control

4.

Implementation control

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 Ethics is defined as “the discipline dealing with what is good and bad, and right and wrong, or with moral duty and obligation.” 

Ethics refers to the moral principles and values that govern the behaviour of a person or group. Ethics helps us in deciding what is good or bad, moral or immoral, fair or unfair in conduct and decision-making. In other words,

ethics

serve as a “moral compass” to guide our actions. 

There are many sources for an individual’s ethics. These include family background, religious beliefs, community standards and expectations.

 Business ethics is the application of general ethical principles and standards to business behaviour. Fred R. David defines business ethics as “principles of conduct within organizations that guide decision-making behaviour.” Business actions are judged by the general ethical standards of society, not by a special set of its own

rules made by a business.

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•

Importance Of Ethics



An ethical organization is driven by ethical values and integrity. Such values shape the search for opportunities, the design of systems and the decision- making processes of the organization.



The potential benefits of an ethical organization are many. A strong ethical orientation can have a positive effect on employee commitment and motivation to excel. This is particularly important in today’s knowledgeintensive organizations, where human capital is critical in creating value and competitive advantage.



The ethical orientation of a leader is generally considered to be a key factor in promoting ethical behaviour among employees.



Unethical business practices reflect the values, attitudes and behavioural patterns that define an organization’s operating culture. Thus ethics plays a critical NMBA041 (STRATEGIC MANAGEMENT) 272 role in organizations.