Strategic Management 20MBA25

MODULE- I

INTRODUCTION TO STRATEGIC MANAGEMENT

The word “strategy” is derived from the Greek word “stratçgos”; stratus (meaning army) and
“ago” (meaning leading/moving).

Strategy is an action that managers take to attain one or more of the organization’s goals.

Strategy is a well-defined roadmap of an organization.

It defines the overall mission, vision and direction of an organization. The objective of a strategy
is to maximize an organization’s strengths and to minimize the strengths of the competitors.

Strategy, in short, bridges the gap between “where we are” and “where we want to be”.

Strategy results from the detailed strategic planning process”.

A strategy is all about integrating organizational activities and utilizing and allocating the scarce
resources within the organizational environment so as to meet the present objectives.

Strategy can also be defined as knowledge of the goals, the uncertainty of events and the need to
take into consideration the likely or actual behavior of others.

Strategy is the blueprint of decisions in an organization that shows its objectives and goals,
reduces the key policies, and plans for achieving these goals, and defines the business the
company is to carry on, the type of economic and human organization it wants to be, and the
contribution it plans to make to its shareholders, customers and society at large.

Features of Strategy

1. Strategy is Significant because it is not possible to foresee the future. Without a perfect
foresight, the firms must be ready to deal with the uncertain events which constitute the
business environment.
2. Strategy deals with long term developments rather than routine operations, i.e. it deals
with probability of innovations or new products, new methods of productions, or new
markets to be developed in future.
3. Strategy is created to take into account the probable behavior of customers and
competitors. Strategies dealing with employees will predict the employee behavior.

Strategy at Various Levels of a Business

Strategies exist at several levels in any organization - ranging from the overall business
(or group of businesses) through to individuals working in it.

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CORPORATE
STRATEGY

BUSINESS
STRATEGY

FUNCTIONAL STRATEGY

Corporate Strategy - is concerned with the overall purpose and scope of the business to meet
stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the
business and acts to guide strategic decision-making throughout the business. Corporate strategy
is often stated explicitly in a "mission statement".

Business Unit Strategy - is concerned more with how a business competes successfully in a
particular market. It concerns strategic decisions about choice of products, meeting needs of
customers, gaining advantage over competitors, exploiting or creating new opportunities etc.

Operational Strategy - is concerned with how each part of the business is organized to deliver
the corporate and business-unit level strategic direction. Operational strategy therefore focuses
on issues of resources, processes, people etc.

Meaning
Strategic Management is defined as the art and science of formulating, implementing, and
evaluating cross-functional decisions that enable an organization to achieve its objectives.
Strategic Management is all about identification and description of the strategies that managers
can carry so as to achieve better performance and a competitive advantage for their organization.
An organization is said to have competitive advantage if its profitability is higher than the
average profitability for all companies in its industry.

Nature of Strategic Management its Importance and Relevance.

Strategic management is both an Art and science of formulating, implementing, and evaluating,
cross-functional decisions that facilitate an organization to accomplish its objectives. The
purpose of strategic management is to use and create new and different opportunities for future.
The nature of Strategic Management is dissimilar form other facets of management as it demands
awareness to the "big picture" and a rational assessment of the future options.
It offers a strategic direction endorsed by the team and stakeholders, a clear business strategy
and vision for the future, a method for accountability, and a structure for governance at the

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different levels, a logical framework to handle risk in order to guarantee business continuity, the
capability to exploit opportunities and react to external change by taking ongoing strategic
decisions.

Importance:
The environmental shocks during the decades of the 1970s and 1980s forced managers to
develop a systematic means of analyzing the environment, assessing their organization's
strengths and weaknesses, identifying opportunities that would give the organization a
competitive advantage, and incorporating these findings into their planning. The value of
thinking strategically was recognized.
1. One reason strategic management is important is because it's involved in many of the
decisions that managers make.
2. Another reason is that studies of the effectiveness of strategic planning and management
have found that, in general, companies with formal strategic management systems had
higher financial returns than those companies with no such systems.
3. Strategic management has moved beyond for-profit organizations to include all types of
organizations, including not-for-profit
4. It promotes forward thinking.
5. It provides a cooperative, integrated, and enthusiastic approach to tackling problems and
opportunities.
6. It encourages a positive attitude toward change.
7. It gives a degree of discipline and formality to the management of a business.

Relevance:
Setting Direction

 An organization needs direction so that it has a plan for arranging its core activities. If
you don't set goals through a strategic management process, your organization operates in
a reactive mode. Use strategic management planning principles to set the course for the
company and to spend business resources in ways that will help you achieve this course.
Focusing on your direction also helps to avoid wasting resources along the way.

Situational Analysis

 Strategic management is based on many concepts, and an important concept in this

management style is called situational analysis. You want the organization you work for
to evaluate its current position in the business market. And, you want the organization to
define where it wants to be, in one year and in five years, such as acquiring a larger share
of the market. This type of situational analysis and the strategic planning that follows it
encourages managers to direct resources so that the desired business position is attained
in a specific time frame.

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Strategic Alliances

 If you have a goal for the organization you work for to grow rapidly, then you look
around for strategic market alliances, which is related to situational analysis. For
example, private companies can use the acquisition of smaller companies to expand their
market base and then introduce the products of those companies in their existing stores.
Tie the growth of the organization to the strategic plan by stating precisely what growth
will look like so everyone in the organization can visualize it.

Innovation

 Strategic management also encourages organizations to look everywhere for new ideas,
which is truly the essence of entrepreneurial-ism. For example, a U.S. chain store that
expands into global markets can share ideas that work for managing a retail operation in
another country with store managers in its home country. Managers are encouraged to
test foreign ideas in their home market. This retailer realizes that goals can be achieved,
even surpassed, by putting ideas into the hands of people who can use them. The
entrepreneurial testing of new ideas is something that you want to be a part of in a
strategically-managed company.

Characteristics of Strategic Management.

1. Uncertain: Strategic management deals with future-oriented non-routine situation. They

create uncertainly. Managers are unaware about the consequences of their decisions.
2. Complex: Uncertainly brings complexity for strategic management. Managers face
environment which is difficult to comprehend. External and internal environment is
analyzed.
3. Organization wide: Strategic management has organization wide implication. It is not
operation specific. It is a systems approach. It involves strategic choice.
4. Fundamental: Strategic management is fundamental for improving the long-term
performance of the organization.
5. Long-term implication: Strategic management is not concerned with day-to-day
operation. It has long-term implications. It deal with vision, mission and objective.
6. Implication: Strategic management ensure that strategic is put into action,
implementation is done through action plans.

Needs of Strategic Management

1. Due to change
2. To provide guide lines
3. Research and development
4. Probability for business performance
5. Systemized decision
6. Improves Communication
7. Allocation of resource

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8. Improves Coordination
9. Helps the managers to have holistic approach
The Strategic Management Process.
Strategic management process has following four steps:

1. Environmental Scanning- Environmental scanning refers to a process of collecting,

scrutinizing and providing information for strategic purposes. It helps in analyzing the
internal and external factors influencing an organization. After executing the
environmental analysis process, management should evaluate it on a continuous basis and
strive to improve it.
2. Strategy Formulation (Strategy Planning)- Strategy formulation is the process of deciding
best course of action for accomplishing organizational objectives and hence achieving
organizational purpose. After conducting environment scanning, managers formulate
corporate, business and functional strategies.

Vision and Mission (The target of the business)

Strength and weakness (Strong points of business and also weaknesses)
Opportunities and threats (These are related with external environment for the business)

The considerations for the best strategy formulation should be as follows:

a. Allocation of resources
b. Business to enter or retain
c. Business to divest or liquidate
d. Joint ventures or mergers
e. Whether to expand or not
f. Moving into foreign markets

3. Strategy Implementation- Strategy implementation implies making the strategy work as

intended or putting the organization’s chosen strategy into action. Strategy
implementation includes designing the organization’s structure, distributing resources,
developing decision making process, and managing human resources.

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4. Strategy Evaluation- Strategy evaluation is the final step of strategy management process.
The key strategy evaluation activities are: appraising internal and external factors that are
the root of present strategies, measuring performance, and taking remedial / corrective
actions. Evaluation makes sure that the organizational strategy as well as it’s
implementation meets the organizational objectives.

Relationship between a Company’s Strategy and its Business Model.

A business model addresses “How do we make money in this business?”

Is the strategy capable of Delivering good results

 Look at revenue streams the strategy is expected to produce

 Look at associated cost structure and potential profit margins

 Do resulting earnings streams and ROI indicate the strategy makes sense and the
company has a viable business model for making money?

Business Model: Concerns whether revenues and costs flowing from the strategy demonstrate a
business can be amply profitable and viable.

(V/S)

Company’s Strategy: Deals with a company’s competitive initiatives and business approaches.

 How to grow the business

 How to please customers

 How to outcompete rivals

 How to respond to changing market conditions

 How to achieve targeted levels of performance

Apple’s Business Model Canvas:

The canvas is described as ìa shared language for describing, visualizing, assessing, and
changing business models. î It's made up of nine building blocks that help focus attention on key
attributes of a business. What follows is an attempt at a business model canvas for Apple, Inc.

Key Components are:

Key Partners

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Activities

Value propositions

CRM

Customer segments

Resources

Channels

Cost structures

Revenue Systems.

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MODULE II
ANALYZING A COMPANY’S EXTERNAL ENVIRONMENT

The Strategically relevant components of a Company’s External Environment

Managers must have a deep understanding and appreciation of the environment in which
they and their organizations function. The environment of business is the „aggregate of Conditions,
events and influences that surround and affect it‟. Since the Organization is part of a broader social
system, it has to work within the framework Provided by the society and its innumerable
constituents.

Features of Environment

Complex: The environment comprises of multifarious events, factors, conditions and Influences
arising from various sources. They interact with each other constantly and Often produce an
entirely new set of influences. It is not easy to state clearly as to what
Kind of forces constitutes a given environment.

Dynamic: The environment of an organization is dynamic and constantly changing.

Changes in technology, government regulations, competitive forces etc. compel Organizations to shift
gears and change direction quite often. At times, there could be too Many changes in too little time,
leading to shocks and surprises in the maker place.

Challenging: All firms are impacted by political, legal, economic, technological and Social
systems and trends. Together, these elements comprise the macro-environment of business firms.
Because these forces are so dynamic their constant change presents myriad opportunities and threats
or constraints to strategic managers.

Environment: External & Internal

Environmental Analysis
Environmental analysis is the process of monitoring the organizational environment to identify
both present and future threats and opportunities that may influence the firm‟s ability to reach its
goals.

Components of External Environments

(i) Economic environment: Economic factors throw light on the nature and direction of the
economy in which a firm operates - national and international economic scenario: availability of credit,
interest rate, inflation, unemployment rate, GDP, fiscal deficit, movement in stock exchange,
growth rates of agriculture, industry infrastructure etc.

(ii) Social and Cultural environment:

Demographic factors: Population, age, religious composition, literacy levels, inter-state
migration, rural-urban mobility, income distribution etc. influence a firm‟s strategic plans
Significantly.
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Cultural factors: Social attitudes, values, customs, beliefs, rituals and practices also Influence
business practices in a major way.

(iii) Religious, ethical and moral factors: Different religions faiths like Hindus, Muslims, Sikhs,
Christians, Buddhists and Jains.

Ethical and morale factors: Corruption, political instability, respect elders, performs rituals etc.

(iv) Political Environment: Many political factors influence how mangers formulate and
implement strategic direction.

(v) Legal Environment: Wage fixation, managerial remuneration, safety and health at work,
location of plants, entry of multinationals, price control, import-export policy,
Licensing policy etc.

(vi) Technological Environment: Technologically breakthroughs can dramatically influence the

organization‟s products, services markets, suppliers, distributors, competitors, customers,
manufacturing processes, marketing practices and competitive position.

(vii) Natural Environment: The natural environment comprises of ecological, geographical and
topographical factors (such as natural resources, weather, climate, location etc) that are relevant to
business.

(viii) International Environment: International developments can greatly impact the ability of an
organisation to do business abroad. For example, fluctuations of the rupee against foreign
currencies influence the ability of an Indian economy to compete in global markets.

(ix) Task/operating/competitive environment: Clients, competitors, suppliers and labour.

Components of Internal Environment

(i) Organizational aspect: structure, communication network, record of success, hierarchy of
objective, policies, procedures and rules, ability of management team.

(ii) Marketing aspect: Market segmentation, product strategy, pricing strategy, promotion
strategy, distribution strategy.
(iii) Financial aspect: Liquidity, profitability, activity, investment opportunity.

(iv) Personnel aspect: Labor relations, recruitments practices, training programmes, performance
appraisal systems, incentive systems, turnover and absenteeism.

(v) Production aspects: Plant facility layout, research and development, use of technology,
purchasing of raw materials, inventory control, use of subcontracting.

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(vi) Managerial aspects: Management style, management competence, managerial values and
norms.

Environmental Scanning

Environmental analysis or scanning is a process by which organizations monitor their internal and
external environment to spot opportunities and threats affecting their business.

Environmental scanning is a concept from business management by which businesses gather

information from the environment, to better achieve a sustainable competitive advantage.
To sustain competitive advantage the company must also respond to the information gathered from
environmental scanning by altering its strategies and plans when the need arises.

Importance sources of information:

International sources: world development report, world economic survey, statistical year book

Government sources: census of India, five year plan reports, India year book, economic survey, CMIE
Report, monthly bulletins of RBI, Indian trade journal.

Other sources: BSE Directory, economic times, other business news paper and magazine,
McKinsey reports, fortune, political weekly.

Technique:

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SWOT
(Strength-Weakness-Opportunity-Threat)
Identification of threats and Opportunities in the environment (External) and Strengths and
Weaknesses of the firm (Internal) These factors which determine the course of action to ensure the
survival and growth of the firm.

P.E.S.T. is an acronym for the Political, Economic, Social, and Technological factors of the
external macro-environment.
Such external factors usually are beyond the firm's control and sometimes present themselves as threats.
However, changes in the external environment also create new opportunities.

Quick Environmental Scanning Technique (QUEST) was developed for use in relatively large
organizations.An underlying assumption is that members of the top management team have valid and
insightful views of the changing external environment.

Forecasting Techniques: Time series analysis, judgmental forecasting, Delphi techniques, expert
opinion,

Scenario Building

The environments surrounding most firms are varied, complex and challenging. It is not easy to present
the collected data in a simple, easy-to-understand format. Scenario building is a useful way of solving this
complexity.

Scenarios are stories about what future environment might hold and how a firm might respond to this
future. Scenarios‟help strategists in focusing attention on the emerging picture after thoroughly analyzing
the pros and cons of a particular situation by integrating objective and subjective parts of various factors.

Scenarios help managers to predict how things will turn out, explain what forces will shape the future
and have a feel for the situations that are likely to unfold.

Industry Analysis -
What are the major trends affecting the growth of the industry in the future? In

summary, will this industry grow faster or slower than average?

Remember that your analysis will be conducted at the industry level, not the organization level
Industry analysis helps a firm find answers to two questions basically:
“What characteristics of the industry are important?”
And
“How can a manager enhance performance given those characteristics?”.

Industry characteristics that could impact a Firm‟s Performance

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* The number of firms in the industry

* The level and pattern of promotional expenditures *
The rate and nature of technological competition * The
relative size of firms
* Consumer preferences for the product and for related products *
The rate of demand growth
*The extent of product differentiation
* The price behaviors of the leading firms
* The minimum efficient scale of production
*Buyer switching costs.

Industry Analysis: Three sections

A. Industry Life Cycle Analysis

Four Stages:
• Introduction/Pioneering Stage
• Rapid Growth Stage
• Maturity and Stabilization Stage
• Decline Stage

B. Study of the structure and characteristics of an Industry

1. Structure of the Industry and nature of Competition

2. Nature and Prospectus of the demand
3. Cost, Efficiency and Profitability
4. Technology and Research

C. Profit Potential of Industry(Porter Model)

Porter’s dominant economic features

• Market size & Growth Rate

• Number of Rivals

• Scope of Competitive Rivalry

• Buyer Needs & Requirements

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• Product Differentiation
• Product Innovation

• Pace of Technology Changes

Industry factors have been found to play a dominant role in the performance of many companies with
the exception of those that are its notable leaders of failures. As such, one needs to understand these
factors at the outset before delving into the characteristics of a specific firm. Michel Porter, a leading
authority on industry analysis, proposed a systematic means of analyzing an industry‟s potential
profitability known as Porter’s “Five Forces” model.
According to Porter, an industry‟s overall profitability depends on five basic competitive forces, the
relative weights of which vary by industry.
1. The Intensity of Rivalry among incumbent firms.- Concentration of competitors, High Fixed or
Storage Costs, Slow, Lack of Differentiation or Low Switching costs.

2. The Threat of new competitors entering the industry.- Economies of Scale, Brand Identity and Product
Differentiation, Capital Requirements, Switching costs, Access to Distribution Channels, Cost
Disadvantages Independent of Size, Govt. policy

3. The threat of substitute products or services. - Rising of a Substitute Products that satisfy similar
consumer needs.

4. The bargaining power of buyers. - Buyers raising the weaknesses on the product, costs, credit etc to bring
down the rates or threaten to discontinue buying. Or buyers go to their own production for economic
reasons.

5. The bargaining power of suppliers. - On the guise of rising costs, the suppliers bargain to raise the rates or
threaten to stop supplies. Competitor cornering the production of the supplier as a threat. Monopoly of the
supplier

Competitive Environment Analysis -In business, being good is not good enough unless it comes from
your customers and is supported by sales and market growth (sustainability).
Factors in the macro environment and the competitive nature of business, means that your
business and market position can easily be affected should you not predict the trends and
movements within the economy, global community and your own industry and market segment. It
is impossible for an organization to develop strong competitive positioning strategies without a
good understanding of the environment and its competitors and their strengths and weaknesses.
Competitive Intelligence is the activity of monitoring the environment external to the firm for
information that is relevant for the decision making process of the company. The objective of
competitive intelligence is not to steal a competitor’s trade secrets or other proprietary property,
but rather to gather in a systematic ,overt manner a wide range of information that when collated
and analyzed provides a fuller understanding of a competitors‟
structure,culture,behaviour,capabilities and weaknesses

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Porter’s Five Forces model -

The Five Forces Model, developed by Michael Porter, provides the groundwork for
strategic action.
Competitive forces determine profitability and are therefore of foremost importance to the firm.
Competition is not manifested only in the other players. Competition is rooted in the underlying
economic structure. Customers, suppliers, potential entrants and substitute products, all have the
potential to impact the market depending on the industry.

1) Threats of Entry: New entrants to an industry bring new capacity, the desire to gain market
share, and often substantial resources. Gaining entry is always not easy as there are barriers to
entry. (i) The economies of scale prohibit entry by forcing the aspirant either to come in on a large
scale or to accept a cost disadvantage (ii) brand identification (product differentiation) creates a
strong barrier by forcing entrants to spend heavily to overcome customer loyalty (remember lux,
bournvita, vicks, good day) (iii) The need to invest large financial resources in order to compete
creates a barrier to entry (iv) Entrenched companies many have cost advantages not available to
potential rivals, no matter what their size and attainable economies of scale. (vi) The government
can limit or even foreclose entry to industries, with such controls as license requirements, and
limits on access to raw material.

2) Powerful Supplier: This is a situation where suppliers can force buyers to pay higher prices and
thus affect their profitability. This would happen if the supplier enjoys monopoly, where the

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switching cost of the buyer is substantially higher, where the industry is not as important customer of the
supplier group, where it sells products having no substitutes etc.

3) Powerful buyers: Customers likewise can force down prices, demand higher quality or more service
and play competition against each other - all at the expense of industry profits. This can usually happen
when buyers have choice of substitutes or an alternative source of suppliers for the same product. Also,
high buyer concentration, threat of backward integration, and low switching costs add to the power of
buyers.

4) Substitute products: By placing a ceiling on the prices it can charge, substitute products or
services limit the potential of an industry. For example, Jute industry suffered badly after facing
competition from petro-chemical based packing products. The demand for fibre glass suffered
likewise when insulation substitutes emerged in the form of cellulose rockwool and Styrofoam.

5) Intensity of Rivalry: There is competitive rivalry between firms on a continuing basis, the various
players in a particular sector or niche try to constantly jockey for position and try new product and
process innovation in order to develop a strategic edge and hence a stronger position in the competitive
space. Intense rivalry is related to a number of factors; competitors are large in number and of
comparable sizes; industry growth is slow; the product or service has low switching costs; fixed costs
are high; the product is perishable; exist barriers are high etc.

Industry driving forces -

Industry conditions change because important forces are driving industry participants (competitor,
customer, or suppliers) to alter their actions; the driving forces in an industry are the major
underlying causes of changing industry and competitive conditions- they have the biggest
influence on how the industry landscape will be altered. Some originate in the outer ring of
macroenvironment and some originate from the inner ring.

Driving forces Analysis:

1. Identifying what the driving forces are

2. Assessing whether the drivers of change are, on the whole, acting to make the industry
more or less attractive
3. Determining what strategy changes are needed to prepare for the impact of the driving
forces

Key Success Factors - concept and implementation.

Strategic advantage profile (SAP) tries to find out organizational strengths and weaknesses in
relation to certain CSF ( advantage factors or competence factors) within a particular industry.
Many industries have relatively small but extremely important sets of factors that are essential for
successfully gaining and maintaining competitive advantages. Known as critical success factors
(CSFs), they have a significant bearing on the overall growth of a firm within an industry.

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CSF - Means to achieve goals

Research has identified four major sources of CSFs in general:

Industry characteristics: CSFs are often industry-specific. CSFs supermarket chains include
inventory turnover, product-mix, sales promotion and pricing. In the airline industry CSFs would be
somewhat different, i.e. fuel efficiency, load factors, excellent reservation system etc. No one set of
CSFs applies to all industries. As industries change, CSFs would also change.
Competitive positions: CSFs vary with a firm‟s position relative to its rivals in the field. Nowa-days
old rivals Coke and Pepsi are discovering there is more money in water than coloured water.
General environments: Changes in any of the dimensions of the general environment i.e.
political/legal, socio cultural, demographic, technological, macroeconomic, global etc. can affect how
CSFs emerge.
Organizational developments: Internal developments, too, take the centre stage and give rise
to new CSFs. For example if several key executives of an investment banking arm quit to form a
competing „spin off firm‟, rebuilding the executive team would become a key issue for the original
firm.

Characteristics of CSF Analysis

- Internal
- External
- Monitor
- Develop

Process of CSF Analysis - Identify

- CSF
- Critical information - internal & external -
Critical assumption set
- Critical decisions
-
Benefits of CSF Analysis
- Results needs - enterprise clearly
- Measure success - prioritize goals
- Needs of end users & enterprise are met

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